Starbucks (SBUX) has had its 50% climb through 2011 before the global economy (especially Europe) caught up with it. It has moved sideways for about 3 weeks now and some analysts believe it will continue in this pattern for the immediate future. This opens up the possibility of a nice short term income play as does the downward adjusting of the EPS for later this year.
Here's what Analysts are Saying
Piper Jaffray lowered its Starbucks price target from $70 to $67 and reiterated the company's Overweight rating. This opinion is not a long term outlook but rather readjustment for the year because of Europe. Jaffary still believes it is a solid long term investment. This is what they wrote:
"Our recent check of 10 stores in Texas suggests the recent 'soft launch' of K-Cups into the retail/store channel is on track to potentially drive traffic as consumer awareness increases." Specific to the single-serve arena, we continue to believe brand equity matters and that Starbucks maintains one of the most prominent global reputations."
It is interesting that almost on key, Baird's has Starbucks priced at $65 with below consensus earnings for the fourth quarter a very real possibility. However, the coffee giant is also seen as attractive for long-term investors. Starbucks now expects the high end of its fiscal third- and fourth-quarter earnings to be 45 cents and 47 cents a share, respectively, lowering each by one cent. The company expects Q3 EPS of 44 to 45 cents and Q4 EPS of 46 to 47 cents, while Wall Street estimates were expecting 46 cents for Q3 and 49 cents for Q4.
Since mid May the company has been trading in a zone and it is expected to trade in some sort of zone for the immediate future. It has a very good foundation at 51 with a slight positive divergence in the RSI. This shows strength in a bullish move but it is so slight, it may not make much of a difference outside of a peak and valley formation. But it does provide us with a predictable pattern to play off of.
(Click to enlarge)
The Options Play
With the stock expected to move sideways in the short term, I am going to use the Bollinger Bands as a judgment point on how to trade. Since the stock is at the lower end of the band I am expecting it to move up. Here is the bull call spread:
- Buy an October 2012 call with a strike of '52.50' (priced at $2.96)
- Sell an October 2012 call with a strike of '55.00' (priced at $1.85)
- Net Debit to Start: $1.11
- Maximum Profit: $1.39
- Maximum Risk: net debit
- Maximum Length of Trade: 4 months
Reasoning behind the Trade:
- Huge growth last year will slow the company down.
- It is expected to trade within a zone (51-55.5) for the near future.
- Europe sales will be a thorn in the company for the rest of the year.
- Short term, there are no growth catalysts taking place.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
