Name That Trade – $SBUX: Coffee Break

by Dan April 23, 2015 2:25 pm • Commentary

So far in this earnings season I am hard pressed to find a group of stocks that have displayed more volatility as a result of corporate announcements than the restaurant stocks.

Last Thursday Panera (PNRA) rose nearly 12% on news that they would issue debt to buyback up to $500 million in stocks (so original).

Yesterday Chipolte (CMG) was down 7.5% on disappointing Q1 results, while Yum Brands (YUM) made a new 52 week high, up 4%, and McDonalds (MCD) was up 3% after both reported results that were not as bad as expected.

Today, Dominoes Pizza (DPZ) is up 9%, Dunkin Brands (DNKN) is up 8.5%, and Cheesecake Factory (CAKE) is up 6%, all on better expected results.

With this sort of movement, you would think these companies trade 15x sales and are busy monetizing mobile messaging apps.

Which brings me to Starbucks (SBUX) who is scheduled to report their fiscal Q2 results tonight after the close. The options market is implying about a 3.5% one day move tomorrow, which is shy of the 4 qtr avg of about 3%.

Consensus estimates call for 17% earnings and sales growth in the quarter just ended, which is essentially the same as the growth rates for the year.  SBUX currently trades at 31x expected earnings, which is getting a tad stretched to its recent history.

From purely a technical standpoint, the stock is in a massive uptrend, up 42% from the 52 week lows, and within a percent of the all time highs made in March:

[caption id="attachment_53052" align="aligncenter" width="600"]SBUX 1yr chart from Bloomberg SBUX 1yr chart from Bloomberg[/caption]

My View:  The stock is priced for perfection, and while high valuation consumer discretionary growth stocks like DNKN and DPZ are going ballistic today to the upside, I think it is important to note that both are $5 billion market cap stocks, and it takes a whole heck of a lot more to get a $74 billion well owned market cap stock like SBUX up 9% to new all time highs.

Hypothetical Trades:

Bullish/ Stock Alternative – Buy the April 24th 49 call for .95

If you feel SBUX is going to break out above $50 this is probably the best way to play, risking less than 2% in the stock with a breakeven  around 1% higher. This trade is massively binary and could be worthless if the stock is lower, but that’s also why it works as a stock alternative where your risk is capped at .90 versus a lot more in the stock.

Bearish/Hedge vs long stock – Buy the April 24th 49 put for .64

SBUX is sort of priced for perfection and a dollar cheap way to play for a earnings move to the 50 day moving average or even a break below is to by the close to the money puts for a little more than 1% in the stock. This obviously also works as a hedge against long shares, locking in most of the recent gains in the stock.