Event: SBUX reports their fiscal Q3 earnings tomorrow (July 25th) after the close. The options market is implying about a 4% one day move, which is below both the 4 qtr avg of about 5.75% and the 8 qtr avg of about 4.75%
Sentiment: Wall Street analysts are bullish on the stock, with 24 Buys, 6 Holds and 1 Sell, though the stock has moved higher so quickly that the avg 12 month price target is only ~$71.50. Short Interest is at only 1% of float.
Options Open Interest: Call open interest slightly outnumbers put open interest by a ratio of 1.15 to 1. The activity over the last month has favored calls over puts by a ratio of almost 2 to 1. The large majority of the open interest is concentrated in Jan14 expiry.
Fundamentals: SBUX is a standout in the restaurant space, with consensus projected earnings growth of 22% over the next 2 years. That’s impressive given that the company has doubled earnings since 2009, and is now a $50 billion market cap company.
It’s the international leader in the cafe/beverage category, but it still has ample room for growth outside the U.S. (only 35% of revenues are international). Goldman research laid out a few more reasons for optimism ahead of this week’s report:
We are most above for SBUX where our 7% SSS forecast compares to the 6.2% consensus. We see strength from (1) a strong correlation to jobs growth, (2) recent management tone, (3) our recent survey results, and (4) the fact that SBUX is anniversarying 2012’s SBUX-specific June slowdow
BUT, as we always ask, what are you paying for all these positive trends. Here’s the chink in the bullish argument, the 5 year chart of SBUX trailing 12 month P/E:
The SBUX multiple is at its 5 year high, near 35. Not surprising given the strong market backdrop. But that’s not the only concern. Other high-flying restaurant names have been hit hard this week, and not just on weak results. PNRA was weak, and the stock is down more than 10% in the last 2 days as a result. But DPZ, another huge winner over the past few years, had a decent report on Tuesday, but closed down 6.5% on relentless selling. Another case where expectations had gotten too high. That’s the risk for SBUX this quarter. The bar might be set too high.
Price Action / Technicals: The 2 year chart of SBUX shows how strong the uptrend has been in 2013:
In 2013, the stock only breached the 50 day moving average for a brief time in February. However, the stock has seen selling in the past 2 days, and is only trading $1 above the 50 day ma around $65.80. The real key support on the downside is the April 2012 high, around $62 (red line). The upside level to watch is the high from last week, near $70.
Volatility: Implied vol has been creeping higher into the event but isn’t super high historically. August vol is about 25, recent cycles have seen front month vol well into the mid 30’s as indicated by the red line and blue E’s:
August vol will come into about 20 following the report.
My View: SBUX has been a splendid company and a terrific investment for those who have owned it for the past 5 years. All signs point to things going according to plan heading into tomorrow’s report. Yet, valuation has gotten expensive, particularly if SBUX does not execute on all cylinders in the second half of 2013. It’s a question of whether the bar has been set too high. For the earnings event, I don’t expect the stock to break 62 on the downside or 70 on the upside. The greater medium-term risk at the current valuation in my view is a break of support at 62.