Event: Starbucks reports fiscal Q1 results tonight after the close. The options market is implying about a 5% one day move, which is rich to the 4 qtr one day avg move of 3.25% and the 10 year average one day move of 3.5%.
Price Action / Technicals: SBUX has shown great relative strength in 2016, down about 2.5% vs the S&P 500 (SPX) down 8%, down only 8.5% from its all time highs made in November, and up nearly 40% from its August 24th flash crash low:[caption id="attachment_60465" align="aligncenter" width="600"] SBUX 1yr chart from Bloomberg[/caption]
SBUX has clearly been range-bounce since recovering from its August Swoon, with $55 as support, but it’s important to note that the downtrend that has been in place early since November is fairly well defined, and a look at the long term chart from the 2008 lows shows just how dramatic the stock’s out-performance has been, up about 1400% vs the SPX up 200%:[caption id="attachment_60466" align="aligncenter" width="600"] SBUX 8 year chart from Bloomberg[/caption]
The problem with a chart like this if and when the bull run is over, it becomes littered with massive air-pockets to the downside. In the case of SBUX there is little solid support in the stock below current levels until somewhere below $50.
Fundamentals / Valuation: China will dominate the headlines despite only 13% of their 2015 sales coming from the region, it is a massive engine for future growth, and one of the reasons the stock trades at 30x this year’s expected earnings that consensus has growing at 20% yoy, on 13% sales growth. On a trailing 12 month basis, SBUX’s nearly 37 P/E is at a post financial crisis high.
Options Activity: there was an interesting opening trade today when the stock was $58.83, a trader sold 12,000 Feb 64 calls at .27 to open. I suspect this is an overwrite to a long stock position of 1.2 million shares, where the trader will receive $324,000 in premium if the stock is below $64. What’s notable about that strike is that $64 is the all time high in the stock made on October 30th, 2015.
My View: On October 29th the company guided for fiscal 2016 which mildly disappointed the street and while the stock was initially down, it closed flat on the day, as investors took the guidance in stride, giving the company the benefit of the doubt. Analysts were excited about very strong comps in the U.S. and the company’s stated comfort in being able to maintain high single digits comps. Investors were only disappointed for a nanosecond that China/Asia Pacific comps were at 6% below expectations. If they disappoint here again, I suspect the stock goes through $55 on the downside. A beat and raise, and the stock rallies above $60. But in this environment I’d be shocked to see a new high. I suspect a pop in the stock gets sold, and that a miss and a guide down gets sold hard.
So What’s the Trade?
We think it makes sense, for a number of reasons, to have solid protection versus existing long stock in the event of the sell off on earnings or with further broader market weakness:
Hedge vs existing long stock:
Vs 100 shares of and existing SBUX (58.25) long, buy the March 55/45 put spread vs selling the March 65 calls for .90 total (put spread collar)
- Sell 1 March 65 call at .40
- Buy 1 March 55 put for 1.60
- Sell 1 March 45 put at .30
Rationale – This put spread collar offers protection below 54.10 all the way down to 45 in SBUX. The sacrifice is that you could be called away on a gap higher above 65 with an effective sale price in the stock of 64.10. But that would be a new high in the stock and would really be bucking the trend of the rest of the market so a call sale at the highs makes sense to help finance the protection below.
Stock Alternative/ Replacement
The other way to define your risk into events in this market is to not own the stock but have options in its place with defined risk:
In lieu of 100 share of SBUX (58.25) Buy the February 57.5/62.5/67.5 call butterfly for 1.50
- Buy 1 Feb 57.5 call for 2.35
- Sell 2 Feb 62.5 calls at .45
- Buy 1 Feb 67.5 call for .05
Rationale – This defines the risk in the stock to 1.50 and targets a reasonable spot near the recent highs. Profits trail off above 62.50 but the max gain at that point is 3.50, so a more than 2 to 1 payout of the money risked and it’s likely that the stock finds some sellers in this market on a pop higher. The key for this trade is the 1.50 that’s risked. It’s breakeven is 59 so not that much higher than where the stock is now but if the stock gaps lower substantially the losses above 1.50 have been averted.
ESTIMATES & FORECASTS From Bloomberg
- 1Q adj EPS est. 45c (range 44c-46c); co. forecast 44c-45c (Oct. 29)
- 1Q rev. est. $5.39b (range $5.22b-$5.55b)
- 1Q total company-owned comp. sales +7.3% (Consensus Metrix, avg of 22)
- Americas comp. est. +7.7%
- EMEA comp. est. +4.5%
- China/Asia-Pac comp. est. +6.1%
- FY16 adj. EPS est. $1.89 (range $1.87-$1.94); co. forecast $1.87-$1.89
- FY16 rev. est. $21.6b (range $21.3b-$22.0b)