Event: SBUX reports their fiscal Q4 earnings tomorrow after the close. The options market is implying about a 3% one day move, which is above the 4 qtr avg of about 1.25%, but in line with the 8 qtr avg of about 3%.
Sentiment: Wall Street analysts are bullish on the stock, with 24 Buys, 6 Holds and No sells, and a 12 month price target of $90.82, nearly 20% above the current price. That bullishness has persisted throughout the year even though SBUX has been rangebound in the past year, and is down 2% year-to-date. Short interest is negligible at 1% of the float.
Options Open Interest: Total open interest is slightly skewed towards puts over calls, by a ratio of 1.25 to 1. The 1 month average volume is also skewed towards puts over calls by a ratio of 1.35 to 1. Of short-term maturities, the Nov22nd 72.5 put and the Nov22nd 80 call both have around 5k in open interest. The bulk of the open interest is in Jan15 expiration, spread relatively evenly across strikes between 65 and 85.
Price Action / Technicals: SBUX has reminded rangebound between $70 and $80 for almost the entirety of 2014. Each minor move above $80 or below $70 has quickly reversed:
The stock is still trading near the midpoint of that range. It would take a major surprise to break either $80 on the upside or $70 on the downside in SBUX, and the odds favor continued rangebound price action. The low level of implied volatility in SBUX generally reflects that expectation.
Volatility: 30 day implied volatility is actually below 20 heading into the event, a far cry from the high 20’s that was common over the past 2 years:
Given that already depressed level, we don’t expect a major vol crush after the earnings event. 30 day implied volatility is likely to fall back into the mid-teens.
Our View: This is what I wrote in last quarter’s earnings preview:
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.
The stock’s continued consolidation has made the valuation gradually more attractive as the year has progressed. SBUX now sports a trailing 12 month P/E of around 29, more reasonable than the 35x P/E at the start of the year. At this point, execution likely matters more than valuation, with the valuation fair if the company can achieve the earnings projections over the next year. We still view the odds for rangebound price action as high, but implied volatility is low, so we might not put on a trade to play for that at the moment.