Starbucks (SBUX) had better than average numbers this past quarter. As I look at the stock and the direction it is going, I would expect it to continue to move up from where it is now. I also believe the transition the company is going through will make it a good investment as a growth stock through 2013.
Why the stock moved up earlier this month
Seeing profit increases this quarter is something rare, especially combined with net income. This is what happened with Starbucks this third quarter and it gave a reason for investors to celebrate. It rose the most in 19 months after reporting fourth-quarter profit increased as new products helped boost U.S. sales. Net income squeaked out gains of 0.1% bringing in $359 million while the forecast was 358.5 million. The guidance being raised for 2013 was the big catalyst. The company said that profit in its fiscal 2013 will be $2.06 a share to $2.15 a share. That compares with a previous projection of $2.04 to $2.14. It seems the plan to boost sales through selling non-coffee items is paying off for the company.
Often, after a huge reactionary gain, companies correct - Starbucks corrected as is now on its way back up again. After suffering through lean years in 2008 and 2009, the company is again going strong. In the 2011 fiscal year the company served 60m customers per week - more than ever. It also had its highest-ever earnings-per-share ($1.62) and global net revenue ($11.7 billion). At the same time the company is evolving into something much greater than a "coffee" shop. Review its recent acquisitions:
- November 2011 it acquired Evolution Fresh, a small California-based juice company.
- In June 2012 Starbucks bought a bakery, Bay Bread, and its La Boulange-branded cafes.
- On November 14th Starbucks made its largest acquisition yet, buying Teavana, an Atlanta-based tea retailer.
The last move is especially a smart move for Starbucks' future. In 2011 the average coffee consumption was 9.39 pounds per person, while tea was a paltry .9 pounds. Yet, coffee consumption has been decreasing since the late 80's and tea-drinking has been growing.
As I have read quite often, geographical expansion will take place in China and this may be the future of Starbuck' main source of revenue growth. The company is planning to open 800 new stores in the next three years to add to the 700 it now has working. I have read how adaptation to cultural differences is working well for the coffee giant. In America, in our fast-paced society we tend to prefer a kiosk type store whereby we can grab a coffee and sandwich and be on our way. But the Chinese prefer to relax on couches in the afternoon and take it easy. The coffee company is adding some stores that are nearly 3,800 square feet and can seat consumers who come with groups of friends and business partners. Its future growth in China will depend upon its continued adaptation to the culture.
The huge gap up in early November lead to the stock attempting to fill that gap through the month. It did fill two thirds before it turned up again. Will it continue to move up from here? It may be a bit early to state as fact, but the recent low in the RSI indicator as the gap filled was barely below the '50' mark which is the difference between bearish and bullish markers. This could show that it is strong enough to continue up now. Even the MACD histogram did not go below the '0' marker. This supports the bullish technical RSI indicator. I can see the stock using the middle Bollinger Band as support if it continues up now. If this takes place, the move looks like it may be very strong.
The Option Play
I believe the stock will move up from here and if I created a short income strategy it would lean toward the bullish side. The stock is presently trading at 50.89.
- Buy the January 2013 call with a strike of '50.00' (priced at $2.38)
- Sell the January 2013 call with a strike of '52.50' (priced at $1.14)
- Net Debit to Start: $1.24
- Maximum Profit: $1.26
- Maximum Risk: net debit
- Maximum Length of Trade: 2 months
Reasoning behind the Trade
- The company recorded good numbers this quarter.
- 2013 outlook was raised.
- These two things, combined together, make a good short-term catalyst.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.