Event: SBUX reports their fiscal Q3 earnings tonight after the close. The options market is implying about a 3.25% one day move, which is above the 4 qtr avg of about 2.75%, but below the 8 qtr avg of about 4.25%
Sentiment: Wall Street analysts are bullish on the stock, with 23 Buys, 6 Holds and 1 sell, and a 12 month price target of $89.35, about 15% above the current price. Short interest is negligible at 1.5% of the float. The stock is up 1.5% so far in 2014.
Options Open Interest: Total open interest is essentially evenly split between calls and puts. However, the 1 month average volume has been skewed towards calls by a ratio of 1.5 to 1. The Aug 80 calls have the most open interest of short-term maturities at over 8k. In Jan15, the Jan15 75 calls and the Jan15 70 puts both have around 10k of open interest, while the Jan15 65 puts have over 14k of open interest.
Price Action / Technicals: SBUX has been in a range ever since reaching a new all-time high of $82.50 in November, though the long-term trend remains higher:[caption id="attachment_43353" align="alignnone" width="600"] SBUX daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg[/caption]
The 50 day and 200 day moving averages are both around $75.50, which is major support for SBUX. On the upside, the first level to watch is the $80 level, which has not been touched since September. Above there, a move above the $82.50 all-time high would be a nice breakout after nearly 9 months of rangebound price action.
Volatility: 30 day implied volatility hit a 2 year low in SBUX in late June. It has risen in anticipation of the earnings event, but is still 5 points lower than where SBUX implied volatility has generally been (27-30) prior to earnings over the past few quarters:[caption id="attachment_43355" align="alignnone" width="600"] 30 day implied volatility in SBUX, Courtesy of Bloomberg[/caption]
The low relative level of options prices is signaling that options traders expected continued rangebound price action.
Our View: We put on a range trade structure in SBUX in early June, and took off the trade last week for basically a wash. In the original trade idea, we first laid out the bullish case for SBUX:
Starbucks is trading at a 3 month high today after an upgrade from UBS. The UBS analyst cited the following factors for the upgrade:
- One of best long-term global growth opportunities among consumer multinationals given good sales growth, earnings visibility, and optionality around out-year initiatives
- FY2015 consensus estimates now reflect higher coffee costs; more recent pullback in coffee may mitigate some fears for full year impact
SBUX has done a terrific job building one of the best consumer brands in the world. The stock had a huge run from 2009 to the end of 2013, and a pause in 2014 is reasonable given the stock’s valuation. At a 32x P/E, with 15-20% EPS growth expected, the stock might need to correct a bit more, either through time, as it has done, or possibly through price as well. Having said that, a number of large cap stocks have staged upside breakouts after strong earnings reports, and SBUX has moved higher on each of its last 4 reports.
We don’t plan a new trade ourselves, since the risk/reward looks relatively even for the upside and downside potential on this one, and implied volatility is low.