$SBUX Q4 Earnings Preview

by Enis January 24, 2013 11:22 am • Commentary

Event:  SBUX reports Q4 earnings tonight after the close.  The options market is implying about a 4.5% move, vs the trailing 4 qtr avg move of ~6.25% and the 8 qtr avg of ~4%.

Sentiment / Price Action:  SBUX is a bit of an underperformer to start the year, up less than 2% in 2013.  The consensus 12 month price target is around 60, and analysts have 25 buys and 7 holds, 1 sell.  Short interest has been relatively stable between 0.5 and 2% of float, at 1.15% now.  

Fundamentals/Valuation:  Starbucks is still primarily a U.S. coffee chain business, with 70% of revenues from the U.S.  But it has continued to diversify, and both its international chain business, and its Channel Development business (which includes its direct distribution business for packaged coffee, and its new Verismo coffee maker) are major growth drivers going forward.

However, the U.S. business has not stagnated.  For the first 9 months of 2012, SBUX had opened 161 new stores in the U.S. (6,866 total now open), and 130 new stores in China (408 total now open), or about 2/3 of their 398 openings globally for the year.  The Chinese growth is obviously a crucial part of the SBUX strategy.

Analysts expect sales growth of 13% in both 2013 and 2014, and earnings growth around 20% in anticipation of higher margins.  The sales growth number seems achievable based on the recent past (10-12% growth from 2010 to 2012) and the company’s fiscal 2013 guidance comments from last quarter’s release:

For fiscal year 2013, we expect moderate revenue growth driven by mid single-digit increased comparable store sales, new store openings and strong growth in the Channel Development business. Licensed stores will comprise between one-half and two-thirds of new store openings.

With sales growth seemingly on track (and likely earnings growth too, given SBUX’s historically stable margins), the main risk to this story is valuation.  Is the stock cheap or expensive relative to the growth that you’re getting?

Here is the chart of P/E over the past 5 years:

[caption id="attachment_21907" align="alignnone" width="506"]5yr P/E of SBUX, Courtesy of Bloomberg 5yr P/E of SBUX, Courtesy of Bloomberg[/caption]

SBUX topped out in April after the P/E got above 35, and has been stagnant ever since.  Given 20% earnings growth projected, investors have treated a 25x multiple as an attractive buy point, and 35x certainly looks too rich.  At 30x, SBUX is a bit rich to fair, but the next trend higher or lower will likely be determined by earnings execution.

Technicals:  The stock is still in a long-term uptrend over the last 4 years.  Here is the 5 year weekly chart:

[caption id="attachment_21908" align="alignnone" width="619"]SBUX 5 yr weekly chart, Courtesy of Bloomberg SBUX 5 yr weekly chart, Courtesy of Bloomberg[/caption]

The stock maintains its uptrend.  It got extended in the spring of 2012, but held the trendline on the subsequent correction.  A move below 50 is probably a buying opportunity, with 60 obvious resistance.

Volatility:  Just like the broader market, 30 day realized volatility (blue line below) in SBUX is basically at 2 year lows.  Against that, 30 day implied volatility (red line) has moved higher ahead of the earnings event:

[caption id="attachment_21910" align="alignnone" width="678"]30 day IV vs. 30 day RV, Courtesy of Livevol 30 day IV vs. 30 day RV, Courtesy of Livevol[/caption]

Though the implied vol has rallied into the event, it is still the lowest it has been prior to an earnings event in the past 2 years.  However, given the low level of realized in both SBUX and the broader market, this seems justified.

Estimates From Bloomberg:
1Q adj. EPS est. 57c (range 55c-59c)
SBUX in Dec. saw 1Q earnings growth near 15%, implies EPS ~58c

  •  1Q rev. est. $3.84b (range $3.79b-$3.91b)
  • 1Q overall comp. sales est. up 5.5% (Consensus Metrix avg. of 24 ests.) vs up 9% Y/y
  • Americas comps. est. up 5.9% vs up 9% Y/y
  •  EMEA comps. est. down 0.3% vs up 2% Y/y
  •  China/Asia Pacific comps. est. up 9.4% vs up 20% Y/y

My View:  Based on both fundamental (a P/E multiple range of 25x to 35x) and technical factors (support in the high 40’s, resistance around 60), my expectation is that SBUX remains rangebound in the 50 to 60 range barring a big earnings surprise in either direction.  For SBUX to break out either way, investors need to view the growth trajectory as permanently changed for the better or the worse.  I don’t expect that given the historical consistency and diversification of SBUX’s businesses.  In other words, I don’t expect an imminent breakout in SBUX stock.