Is Starbucks A Worthwhile Investment?

With shares of Starbucks (NASDAQ:SBUX) trading around $73, is SBUX an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Starbucks is a roaster, marketer and retailer of coffee operating worldwide. The company purchases and roasts coffees that it sells, along with handcrafted coffee, tea and other beverages and a variety of fresh food items, through its stores. It also sells a variety of coffee and tea products and licenses its trademarks through other channels, such as licensed stores and national food service accounts. In addition to its flagship Starbucks brand, the Company’s portfolio also includes Tazo Tea, Seattle’s Best Coffee, Starbucks VIA Ready Brew, Starbucks Refreshers beverages and the Verismo System by Starbucks. Starbucks has developed an amazing reputation over the last several years which has generated a lot of buzz for its products. Consumers continue to enjoy Starbucks branded products around the world which will surely lead to rising profits.

Starbucks’ earnings beat expectations, with the coffee giant showing growth in both sales and profit for the quarter. The company’s push into providing better food options has already started to pay off. Starbucks has introduced salads, La Boulange baked goods, and is working on a partnership with Danone for its own yogurt brand. Starbucks’ new Refreshers energy drinks and macchiatos also helped drive sales.

T = Technicals on the Stock Chart are Strong

Starbucks stock has been on a bullish run over the last several years. The stock is now trading near all-time highs and sees no significant signs of slowing. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Starbucks is trading above its rising key averages which signal neutral to bullish price action in the near-term.

SBUX

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Starbucks options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Starbucks Options

20.85%

0%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Starbucks’ stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Starbucks look like and more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

27.91%

27.50%

14.00%

-0.51%

Revenue Growth (Y-O-Y)

13.24%

11.26%

10.59%

10.96%

Earnings Reaction

7.53%*

-0.82%

4.10%

9.05%

Starbucks has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been excited about Starbucks’ recent earnings announcements.

* As of this writing

P = Excellent Relative Performance Versus Peers and Sector

How has Starbucks stock done relative to its peers, Dunkin’ Brands (NASDAQ:DNKN), McDonald’s (NYSE:MCD), Green Mountain Coffee Roasters (NASDAQ:GMCR), and sector?

Starbucks

Dunkin’ Brands

McDonald’s

Green Mountain Coffee Roasters

Sector

Year-to-Date Return

35.80%

30.41%

10.36%

81.45%

24.91%

Starbucks has been a relative performance leader, year-to-date.

Conclusion

Starbucks provides highly demanded coffee and tea products and services to consumers around the world. A strong earnings report has investors in the company excited. The stock has been on a strong run for several years and seems poised to continue. Over the last four quarters, earnings and revenue figures have been rising which have pleased investors. Relative to its peers and sector, Starbucks has been a strong year-to-date performer. Look for Starbucks to OUTPERFORM.

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