Does Starbucks Have a Bright Future?

With shares of Starbucks (NASDAQ:SBUX) trading around $75, 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 the coffees it sells along with handcrafted tea and other beverages, and a variety of fresh food items through its stores. Starbucks sells a variety of coffee and tea products and licenses its trademarks through other channels such as stores and national food service accounts. In addition to its flagship Starbucks brand, the company’s portfolio features Tazo Tea, Seattle’s Best Coffee, Starbucks VIA Ready Brew, Starbucks Refreshers beverages, and the Verismo System by Starbucks. Starbucks has developed a solid reputation over the last several years, which has generated a lot of buzz for its products.

Starbucks is ready to give back to Colombia, the country that has supplied its famous coffee beans for more than 40 years. According to Reuters, Starbucks recently officially announced it would finally be opening its first cafe in the country in 2014, and it expects 50 other coffee shops to follow suit within the next five years, starting in the capital, Bogota, and spreading outward. The cafes will be facilitated through a joint venture between Alsea, a Mexican restaurant firm that already operates more than 500 Starbucks stores in Latin America, and Colcafe, a subsidiary of the fourth-largest Colombia food company.

T = Technicals on the Stock Chart Are Strong

Starbucks stock has been surging higher in recent years. The stock is currently trading near all time high prices and looks poised to continue. 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

30.88%

96%

93%

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

Put IV Skew

Call IV Skew

October Options

Flat

Average

November 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 significant 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’s 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)

13.26%

11.26%

10.59%

10.96%

Earnings Reaction

7.61%

-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 pleased with Starbucks’s recent earnings announcements.

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

40.54%

35.74%

5.58%

78.52%

30.19%

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

Conclusion

Starbucks provides in-demand coffee and tea products and services to consumers around the world. Expansion efforts are increasing as the company looks set to open stores in Colombia. The stock has been surging higher in recent quarters and is now trading near all time high prices. Over the last four quarters, earnings and revenues have been rising, which has left investors pleased about recent earnings announcements. Relative to its peers and sector, Starbucks has been a year-to-date performance leader. Look for Starbucks to OUTPERFORM.

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