Name That Trade – $SBUX: Tall Drip

by Dan July 23, 2015 2:55 pm • Commentary

Event: SBUX reports fiscal Q3 results tonight after the close. The options market is implying about a 4.25% one day move tomorrow which is basically inline with the 4 qtr avg of about the same.  

Price Action / Technicals: The stock made a new all time high today, and is up 38% on the year and up 60% from the 52 week lows made last October.

The 10 year chart of SBUX shows what has been a very healthy incline since the lows in 2009.  A very healthy consolidation from late 2013 until the breakout earlier this year and the subsequent parabolic 30% rally:

[caption id="attachment_55600" align="aligncenter" width="600"]SBUX 10yr chart from Bloomberg SBUX 10yr chart from Bloomberg[/caption]

Sentiment: Wall Street analysts are in love with the stock with 27 Buy ratings 6 Holds and NO Sells. Ugh.

Volatility Snapshot:  30 day at the money Implied Vol (blue below) is nearing levels of the last 2 quarterly reports, while realized vol (white below) is at the lows of 2015.  Options prices look fair into the print, not cheap, and not particularity expensive given the stock’s recent gains:

[caption id="attachment_55601" align="aligncenter" width="600"]SBUX 1 yr chart of 30 day at the money IV vs realized from Bloomberg SBUX 1 yr chart of 30 day at the money IV vs realized from Bloomberg[/caption]

My View:  SBUX is a good old fashioned cult stock, like CMG, DIS, NKE and TSLA.  There is no level of bullishness that is too much as long as they keep putting up mid teens percent earnings and sales growth.  Trying to short this stock, and the others listed above have been a fools errand for the most part. Its important to remember though that 30% of SBUX’s sales come from outside the U.S. and guidance of adverse impact from the strength of the dollar and the health of emerging markets like China will likely dictate the stock’s reaction.

If you have missed the move since the $40 breakout in late January and you are now considering a long, I suspect you are a tad late to the story. A pullback to $50 seems like it would offer a nice long entry point.  At this point we see no reason to step in front of a cult stock thats been working and try to pick a top, but this is the sort of trade we would look at after results depending on the quality of the report and guidance and the stock’s reaction.

Hypothetical Trade: SBUX ($56.70) Buy Sept 55/50 Put Spread for $1

-Buy 1 Sept 55 put for 1.33

-Sell 1 Sept 50 put at .33

Break-even on Sept Expiration:

Profits: up to 4 between 54 and 50 with max gain of 4 at 50 or below.

Losses: of up to 1 between 54 and 55 with max loss of 1 above 55



3Q adj. EPS est. 41c (range 40c-42c); co. forecast 40c-41c (April 23)
3Q rev. est. $4.87b (range $4.76b-$4.97b)
3Q total comp. sales est. +6.2% (Consensus Metrix avg of 28)
Americas comps. est. +6.3%
EMEA comps. est. +3.7%
China & Asia Pacific comps. est. +8.8%
FY15 adj EPS est. $1.58 (range $1.55-$1.64); co. forecast $1.55-$1.57 (April 23)
FY15 rev. est. $19.16b (range $18.9b-$19.41b) implies y/y growth 16%; co. forecast growth 16%-18% (April 23), saw comp. sales growth in mid-single digits
4Q adj. EPS est. 43c; co. forecast 42c-43c (April 23)