Name That Trade(s) – $SBUX: Better Latte Than Never

by Dan October 29, 2015 2:00 pm • Commentary

Event: Starbucks (SBUX) reports fiscal Q4 results tonight after the close. The options market is implying about a 4.5% one day move tomorrow, which is rich to the 4 qtr average of about 3.75% and basically in line with the 10 year average.

Price Action / Technicals: The stock is up 51% on the year, aside from its massive Aug 24th crash low, the stock has been on a runaway breakout since early January, and it was one of the first large cap U.S. multi-nationals to come back from the depths of its August lows to make a new all time high:

SBUX 7 year chart from Bloomberg
SBUX 7 year chart from Bloomberg

On a shorter term time horizon, there is NO overhead resistance, the stock is in uncharted territory.  Looking down though, the recent breakout above $59.50 (green below) to new highs in early Oct is an obvious level for the stock to pull back to, nearly in line with the implied move, while the stock should find massive support at $55, the Sept 29th low (red below):

SBUX 1yr chart from Bloomberg
SBUX 1yr chart from Bloomberg

Estimates & Forecasts from Bloomberg:

4Q adj. EPS est. 43c (range 43c-45c); co. forecast 42c-43c (July 23)
4Q rev. est. $4.9b (range $4.78b-$5.14b)
4Q total comp. sales est. +6.9% (Consensus Metrix, avg of 22)
-Americas comps. est. +6.9%
-EMEA comps. est. +2.7%
-China & Asia Pacific comps. est. +9.6%

FY16 adj. EPS est. $1.88 (range $1.83-$1.94)
FY16 rev. est. $21.45b (range $21.01b-$21.94b)
FY16 total comp. sales est. +5.3% (Consensus Metrix, avg of 18)
-Americas comps. est. +5.4%
-EMEA comps. est. +3.4%
-China & Asia Pacific comps. est. +6.5%

Valuation vs Growth:   SBUX is expected to report fiscal 2015 earnings growth tonight of 19% and 16% sales growth.  Consensus is calling for 19% eps and 12% sales growth in fiscal 2016.  Investors have rewarded SBUX with the stock trading at 39x 2015, and 33x expected 2016, with trailing at a post financial crisis high.  I think it is safe to say there are not too many U.S. multinationals with $90 billion market that have been able to display this sort of growth given the obvious headwinds of dollar strength and weak demand in emerging markets.

My Take:  in the latest quarter, more than 70% of SBUX operating income came from from the Americas, with 12% from China/Asia Pacific, with China’s growth helping to push global comps to 7%, up from 6% in the prior quarter. While two thirds of their stores are in the Americas, investors will only pay the massive premium as long as there are no hiccups to their growth engine.  China seems to be just fine for Nike and Apple, but not so well for Yum and U.S. industrials. Extrapolating NKE and AAPL’s strength in the region to another kind of premium brand like SBUX is not entirely intuitive given the price point. I suspect traffic in the U.S. is just fine and that the company struggles a tad in China.

I would not buy this stock with your money, but could the stock pull a AMZM, GOOG or MSFT sort of move on a beat and raise? No doubt about it. It’s just that sort of brand in a market that is willing to pay for high quality growth at any price.

So whats the trade?  

Here are a few options trade ideas depending upon your current positioning or directional inclination:

Bullish/stock alternative:

SBUX ($62.50) Buy the Nov 62.5/67.5/70 (uneven) call fly for 1.50

Rationale – Profits above 64 like stock with max gain at 67.50. Profits trail off  above there but then become locked in above 70 as the fly wing is 2.50 closer than a normal fly. This fly is bullish but even more so by using the 70 call.


Bearish/hedge vs long stock:

SBUX ($62.50) Buy the Dec 60/50 put spread for 1.40

Rationale – Going out to Dec (rather than weeklies) probably gives you the most bang for your buck and this trade offers a wide range of profitability, paying 1.50 for the chance to make. This is also great for long time holders that want to protect profits.


Yield enhancement vs long stock:

vs. 100 shares of SBUX ($62.50) sell the Dec 67.50 call at .70

Rationale – Overwrites in SBUX are a bit difficult because the stock grinds higher and the options reflect that. You don’t get a ton of premium out of the money on the upside. This means you probably have to go out a few months to get something of value but safe enough away that you won’t be called away in the stock on one move. This call gives you just over 1% of yield in the stock.