Only individuals who are bullish on Starbucks Corp (SBUX) should consider employing this strategy. If you are not bullish on this stock, then it would be in your interest to look for alternative plays.
Reasons to be bullish on Starbucks Corp:
- A strong levered free cash flow of $770 million
- A good quarterly revenue growth of 14.7%
- Net income soared from $391 million in 2009 to $1.24 billion in 2011.
- EBITDA increased from $1.1 billion in 2009 to $2.3 billion in 2011.
- Cash flow per share increased from $1.57 in 2009 to $2.30 in 2011.
- Sales increased from $9.7 billion in 2009 to $11.7 billion in 2011.
- Annual EPS before NRI increased from $.87 in 2007 to $1.52 in 2011
- A very low long-term debt to equity ratio of 0.11
- A very strong interest coverage ratio of 52.9
- A quarterly earnings growth rate of 18.5%
- A good five year ROE Average of 25%
- great current ratio of 2.20
- A free cash flow yield of 2.55%
- A projected 3-5 year EPS growth rate of 17.7%
- A manageable payout ratio of 42%
- A good retention ratio of 68%
- It has strong institutional support; percentage held by institutions is 78%
- Year-over-year projected growth rates of 21.29% and 25.2% for 2012 and 2013 respectively.
- $100K invested for 10 years would have grown to $531K
It reported stellar second-quarter results. Some of the highlights from the second quarter are:
- Global comparable sales growth increased by 7%.
- Growth in comparable stores in China improved for the 7th consecutive quarter as sales growth exceeded the 20% mark
- EPS rose to a record of $0.40; an increase of 18%
- Total net revenue came in at $3.2 billion and increase of 15%
- It opened up an additional 175 new stores globally. It now has 3,000 stores in the China/Pacific segment. It also opened its first store in Norway.
- Channel development revenue soared by 57%, primarily driven by sales of Starbucks and Tazo branded K-Cup packs.
- Management is accelerating new store growth to approximately 1000 new net stores for fiscal 2012 and raising their earnings targets for the year
(Click charts to enlarge)
Strategy
After correcting strongly, a market usually rallies then tests its low again before putting in a tradable bottom. If this scenario pans out, then Starbucks could test its recent lows in the 51 ranges before trending higher. This play has two parts to it. The first part entails the selling of a put, and the second part entails the purchase of a call with the proceeds from the sale of the put.
Part I
If you are not willing to wait for the stock to pull back, you can put this strategy to use immediately. If you decide to put it to use immediately simply sell and buy the stated puts and calls and the current price. We are going to base our example on the assumption that it will test its recent lows (51.49) again. It is currently trading at 53.48, and the Jan 14, 50 put is trading in the 8.05-8.20 ranges. If the stock trades in the 51.50-52.00 ranges, it will shed 1.48-2.00 and the stated option should trade in the 9.00-9.20 ranges. For this example, we will assume that we can sell the puts for 9.00. For each contract sold $900 will be deposited in your account. This money is now going to be used to initiate the second part of this play.
Part II
The Jan 2014, 65 call is trading in the 4.90-5.05 ranges. If the stock sheds 1.50-2.00, it should drop down to the 4.15-4.25 ranges, if not lower. For this example, we will assume that we can buy the Jan 2014, 65 calls for $4.25. Investors can purchase up to two calls for each put sold and still have some change left over. If you purchase two calls, you will be left over with $50 per transaction. If, on the other hand you purchase 1 call only, you will be left over with $475 per transaction. If the shares are assigned to your account, this left-over money can be used to lower your entry cost.
Risk factor
If the stock trades below the strike price, the shares could be assigned to your account. However, this should not be an issue if you are bullish on the stock as you will be able to get in at a much lower price. Your final cost will range from $61.75-64.50, deepening on the number of calls you purchased with the proceeds from the sale of the puts.
Conclusion
The benefit of this strategy is that it provides you with the opportunity to significantly leverage your position without any out of pocket expense. If the shares are assigned to your account, your final cost would range from $61.25-64.50 depending on the number of calls you purchased. As a final reminder this strategy should only be employed by individuals who have a positive long-term outlook on Starbucks. Investors willing to take on a bit more risk might find this article to be of interest: Westport Innovations Among 1 Of 4 Interesting Speculative plays
EPS and Price Vs industry charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Ychart's data sourced from ycharts.com. Option's table data sourced from yahoofinance.com. Earning and growth estimate's data sourced from dailyfinance.com
Disclaimer: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
