Some companies have defined cyclical earnings trends, and Starbucks (NASDAQ:SBUX) is one of them. The company usually makes the most money during the fourth quarter of every year, followed by a drop off with the first quarter of the following year being the worst seasonally. This is typical, but during the last cycle the decline from the fourth quarter to the first has been more pronounced, and that has some eyebrows raised.
With a closer look though, we can see that there has also been exceptional growth leading up to this more pronounced pullback, so we cannot go as far as to say that this one data point should cause investors to be concerned. In order for investors to be concerned about the earnings growth rate at Starbucks something more will need to happen. Based on what we're seeing now, although the most recent setback was more pronounced than in first quarters of previous years, the earnings trend is still intact.
After extracting the extraordinary items from the earnings releases, Starbucks trades with a multiple of about 30 times trailing earnings. Initially this would also seem rich, but the company has been able to grow at a rate faster than 30% a year, so that multiple fits recent earnings cycles. Given that there are no breaks to the earnings trend at this time, there is no reason to expect significant multiple contractions. If a break in the trend occurs then significant multiple contractions can come, because without the corresponding growth the current PE multiple will absolutely look rich.
Now, and possibly the most important item for traders, Starbucks is also starting to break back beyond its longer term resistance level. In our real time trading report for SBUX we show that the stock is now officially above longer term resistance again and so long as that remains true we will expect the stock to continue to increase. That break of resistance was a technical buy signal, and so long as Starbucks remains above that level higher levels should be expected by rule, but also that former level of resistance, which has now been converted into support, acts as our risk control mechanism. If the stock fades back below the resistance line that was broken recently buyers should reconsider because the stock will have an ability to decline all the way to longer term support again.
Lastly, Starbucks is preparing to roll out a number of new beverages, some of which will compete with its subsidiary Teavana, but as the company has been doing almost religiously, they continue to look for ways to increase same store sales in addition to, of course, traditional expansion.
Thus far, nothing appears to have changed, the company seems on the same track, but if that does change I expect the first warning sign to come from the technical observations.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: By Thomas Kee for Stock Traders Daily and neither receives compensation from the publicly traded companies listed herein for writing this article.