prev

SBUX: WE REMAIN BULLISH

This note was originally published July 24, 2013 at 13:11 in Restaurants

We remain bullish on Starbucks at current levels.

 

SBUX: WE REMAIN BULLISH - bucks

Despite the stock trading at the high end of its historical consensus forward earnings and cash flow multiples, we believe there is more upside in store.  The bullish factors we are focused on include rapid unit growth in China, expansion into new segments of the global food and beverage industry and a commodity tailwind that appears to be getting stronger.

 

There is still significant leverage in the SBUX business model.  In 3Q13, SBUX is estimated to report 23.3% EPS growth ($0.53) on 12.9% revenue growth.  In 2Q13, the company reported 27.5% EPS growth ($0.48) on 11.3% revenue growth.

 

One of the biggest risks to SBUX is sentiment, as SBUX is currently the highest ranked stock in the Hedgeye Sentiment Monitor.  In 2Q13 SBUX raised its full-year EPS guidance to a range of $2.12 to $2.18.  With sentiment high and expectations likely baked into estimates, it is difficult to envision a significant upside surprise in 3Q13 earnings.

 

Short-term trades are difficult to call from a fundamental perspective, but the bullish long-term TAIL remains the best play in the restaurant space.  

 

 

Sales Trends


Same-store sales are estimated to be 6.1%, -0.5% and 9.2% in the Americas, EMEA and China, respectively.  All regions, barring EMEA, are expected to have slowed on a 2-year basis. 

 

We suspect that the EMEA region will report a same-store sales number down 2-3% and will be one of the biggest disappointments of the quarter.

 

China is comparing against a significantly easier comparison (12%) in 3Q13 versus 2Q13 (18%).  Having no edge on what the sales trends look like in China, we would suspect that there is risk to the downside due to the current macro fundamentals in China.

 

Consensus expectations for same-store sales in the Americas are at 6.1%, which would be a slight sequential improvement over the 6.0% reported in 2Q13.  However, this would suggest the 2-year trend is slowing sequentially, by 40bps, to 6.6%.  All told, Starbucks’ Americas business is one of the best positioned chains in the restaurant industry. 

 

HEDGEYE – There are a number of initiatives under way that could drive additional traffic and check (technology, food and juice) and allow for above average sales momentum for the immediate-term. 

 

SBUX: WE REMAIN BULLISH - sbux1

SBUX: WE REMAIN BULLISH - SBUX EMEA

SBUX: WE REMAIN BULLISH - SBUX CHINA

 

 

Margins


Operating margins improved 180bps in 2Q13 and the expectations are for them to improve another 120bps in 3Q13.  We suspect that the Americas will be the biggest driver of margin improvement, with operating leverage provided by the scale and synergies among digital, card, loyalty, mobile and social platforms.

 

HEDGEYE – We believe that the coffee tailwind will benefit SBUX for the next two fiscal years.

 

SBUX: WE REMAIN BULLISH - SBUX OP MARGIN

 

 

Food Cost Trends


The coffee tailwind is only three quarters old and we have no reason to believe SBUX will face any significant margin pressure from other commodities.

 

HEDGEYE – We suspect SBUX will realize a multiple year benefit from a decline in food costs.

 

SBUX: WE REMAIN BULLISH - SBUX COGS

 

 

Store Operating Expenses

SBUX continues to leverage the store operating expense line.  Strong top line momentum, in addition to an intense focus on store operations (labor and waste utilities management), is giving the company significant leverage on this line.

 

HEDGEYE – While nothing lasts forever, we believe that the strong traffic trends in the U.S. indicate that the customer experience remains very positive.

 

SBUX: WE REMAIN BULLISH - SBUX STORE OP EXP

 

 

Sentiment


Highlighted in the chart below, 77.4% of analysts rate SBUX a Buy, 19.4% rate SBUX a Hold, and 3.2% rate SBUX a Sell.  Sell-side sentiment regarding the stock remains very high.  Further, short interest in the stock is only 1.18% of the float.

 

HEDGEYE – Sentiment is high, but where else can you turn to for global growth in the restaurant space?

 

SBUX: WE REMAIN BULLISH - SBUX ANR

 

 

Valuation


At 15.0x EV/EBITDA SBUX is trading significantly above its QSR peer group trading at 12.4x EV/EBITDA.  With YUM’s ongoing issues and MCD facing a secular downturn, it is not surprising that SBUX is trading at a premium multiple to both companies. 

 

HEDGEYE – We suspect there could be a correction in valuation.  However, the most important question remains: How much upside is there to EPS?

 

SBUX: WE REMAIN BULLISH - SBUX 3PE

SBUX: WE REMAIN BULLISH - SBUX 3YR EVEBITDA

 

 

 

Howard Penney

Managing Director

HPenney@hedgeye.com

 


European Banking Monitor: Broad Improvement

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

---

 

European Financial CDS - Last week saw large improvements in French, Greek, Italian, and Spanish swaps. In fact, the only company that saw swaps rise was Sberbank of Russia, where swaps backed up another 14 bps to 238 bps. Sberbank swaps have become increasingly tethered to the outlook for oil prices.

 

European Banking Monitor: Broad Improvement - ww. banks

 

Sovereign CDS – Last week saw another across-the-board tightening in sovereign credit default swaps. Spain, Italy and Portugal led the improvement with declines of 15 bps, 12 bps and 11 bps, respectively. Ireland and France followed with 8 bps and 5 bps. The U.S., Germany and Japan were all tighter by 1-2 bps. 

 

European Banking Monitor: Broad Improvement - ww. cds 1

 

European Banking Monitor: Broad Improvement - ww. cds 2

 

European Banking Monitor: Broad Improvement - ww. cds 3

 

Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 1 bps to 13 bps.

 

European Banking Monitor: Broad Improvement - ww. euribor


Bullish: SP500 Levels, Refreshed

Takeaway: Bears will be bitter.

POSITIONS: 5 LONGS, 2 SHORTS @Hedgeye

 

These market corrections are huge. I opened the day net short (4 LONGS, 5 SHORTS) because Friday’s close was immediate-term TRADE overbought. SPY dropped a whopping -0.35%, then rallied back to its all-time high on another bullish #GrowthAccelerating data point.

 

ISM non-manufacturing (i.e. the bulk of the US economy) accelerated to 56.0 in JUL vs 52.2 in JUN and some of the components within the report ripped (New Orders 57.7 vs 50.8 last month, and Business Acvivity 60.4! vs 51.7 last month). Bears will be bitter.

 

Across our core risk management durations, here are the lines that matter to me most:

 

  1. Immediate-term TRADE resistance= 1714
  2. Immediate-term TRADE support = 1693
  3. Intermediate-term TREND support = 1630

 

Higher-lows, higher-highs, and accelerating US growth data looks just about right. Don’t forget that’s what Gold and Bonds have been discounting now all year. Growth as a style factor within equities is ripping too (Top25 EPS growers in our SP500 model = +7.3% m/m and +26.8% YTD).

 

Don’t fight the data – and keep moving out there,

KM

 

Bullish: SP500 Levels, Refreshed - SPX


GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

E-Cigs: What’s Big Tobacco Saying?

Takeaway: A brief review of Big Tobacco’s Q2 earnings call commentary on electronic cigarettes.

This note was originally published July 30, 2013 at 12:44 in Consumer Staples

Below we’ve collected Big Tobacco’s Q2 earnings call commentary on electronic cigarettes. A common thread among the big four (LO, RAI, MO, PM) is excitement to participate in the category, focused investment behind it, but cautious optimism on the runway for e-cigs as a category and general uncertainty on just how the FDA will regulate e-cigs in the future.

 

E-Cigs: What’s Big Tobacco Saying? - ecig

 

LO led the group in terms of bullish sentiment on claims of strong incidence of repeat trialing (conversion) of e-cigs, whereas the others suggested conversion rates still remain low or that it’s too early to measure results. 

 

Big Tobacco’s push into e-cigs began last year, and of the big four, LO was the first out of the gate purchasing Blu last April. As we show in the table below, both RAI and MO are launching their e-cig versions this month and next month, while PM commented that it may have ambitions to get in the market in 2016/17. 

 

E-Cigs: What’s Big Tobacco Saying? - hedpic

 

Lorillard’s e-cig Blu holds the number one dollar share of the total e-cig market at ~40% followed by NJOY (private) at ~30%. Across the xAOC channel (= all channels excluding convenience), the leading brands include: Blu (44.5%), FIN (20.6% share), Mistic (11.7% share), and NJOY (10.8% share).

 

U.S. e-cigs sales were projected at $150MM in 2011, $500MM in 2012 ($300MM across retail channels and $200MM over the internet), and are estimated to be around $1-2B in 2013. Currently e-cigs represent 1% or less of the portfolio of any Big Tobacco company, however we think there is a huge runway for converters in the $90B annual tobacco industry and believe e-cigs may be the first truly new consumer product in the markets in many years. They offer a compelling alternative to traditional cigarettes and offer the consumer a much different experience than a nicotine patch or gum.

 

The involvement of Big Tobacco in the category should continue to lend credibility to e-cigs and accelerate growth; we expect e-cigs to be margin-enhancing to the combined cigarette category for Big Tobacco and 2014 to be a breakout year for them, having tested the waters in 2013.

 

 

LO:


E-cigs were a hot topic on the call. LO reported that Blu achieved net sales of $57MM in the quarter with over a 40% retail market share. In the quarter it added its e-cigs to 30K retailers to bring its total to 110K retailers.

 

LO said Blu’s topline grew year-over-year, but was flat sequentially due to the rollout of its new rechargeable kit. LO only sold rechargeable Blu units in 2 of the 3 months out of the quarter as it took one month to draw-down inventory of its old model before the June 24th launch of its new model to replace the older version.

 

LO, unlike RAI or PM, was very bullish in its commentary on repeat purchases of its e-cig, and confident that although the new rechargeable kit is sold at break-even for the company, the razor-razor blade model of the kit-cartridge will prove profitable.  As of Q1 2013 (no update on the call), disposables accounted for 51% of its e-cig sales. We believe the company will be pushing to expand its more profitable rechargeable business at the expense of less profitable disposables, and we think the new rechargeable is a catalyst for this shift, and should be margin enhancing as distribution and investment behind the brand expand.

 

Feedback according to CEO Murray Kessler on e-cigs from retailers is very positive given the opportunity for higher margins versus other tobacco offerings.  On who is switching to e-cigs, Kessler offered up it’s typically users of less tar cigarettes. He added, this is another reason why he expects less cannibalization with its full-flavored menthols or even its new Newport non-menthol Golds.  

 

 

RAI:


The company looks to continue to invest in its e-cig brand Vuse in the back half. It opened its earnings call by underling that it’s excited that Vuse is expanding into its first major market, Colorado. In the Q&A, the company noted that Vuse will grow to have a commanding presence in the e-cig market, already out in 500 retail stores in the first week, with a flavor profile it calls superior to its competitors.

 

On industry trends, it claims it’s too early to talk about the consumer response, but said retailers are extremely positive. It noted that while e-cigs have strong trialing, so far the conversion rate is low. RAI also said that while its products may have product displays at retail locations that are available to the customer, the actual product is located behind the counter and access is clerk-assisted.

 


MO:


Responding to questions if E-cig have any impact on cigarette volumes this quarter, management gave no color beyond that e-cigs are having some impact. It noted that they’re thinking about what the size is now and what it can be down the road and there is a lot that has yet to be resolved: what the regulatory structure could be, and depending on that, the impact on the size of the category. Further they’re not sure about what excise taxes may be.

 

On playing catch-up to LO with its MarkTen, the CEO said we're still in the early days in the e-vapor category, and he’s confident that MarkTen will be a strong player in the category.  He added that MO’s strategy remains to maximize the core business while taking appropriate steps forward with innovation. He said, in e-vapor category we want to learn our way in.

 

On marketing plans for MarkTen the CEO noted that because the products contain nicotine, they’ll put appropriate warnings on the product, which it will bear despite the fact that it is not currently regulated by the FDA. It’s target audience is adult smokers and vaporers, and noted that the company will take the appropriate steps so that the product doesn’t reach an unintended audience.

 

 

PM:


In the Q&A there were a couple questions on E-cigs. CFO Olczak kept his words brief but said that the market is difficult to estimate, and he doesn’t think it is more than 1% of the industry, which itself might be a high estimate. He believes demand and interest overall is much stronger in the U.S. than in Europe and that what’s distinguishing the category is its lower price points versus traditional cigs, and that the taste profiles don’t compare. He cannot size up if the category will be one with staying power, or one that is a fad. Finally, he hinted that PM could get involved in the market in 2016/17.

 

Matthew Hedrick
Senior Analyst 


Morning Reads on Our Radar Screen

Takeaway: Here's a quick look at stories on Hedgeye's radar screen.

Keith McCullough – CEO

Health food fight ramps up as Ackman hits Soros over Herbalife (via NY Post)

Treasuries Are World’s Worst-Performing Bonds (via Bloomberg)

Sri Lanka Opens $500 Million Port Terminal Built by China (via Bloomberg)

World's first lab-grown burger to be cooked and eaten (via BBC)

 

Morning Reads on Our Radar Screen - earth1

 

Daryl Jones – Macro

Shale Explorers Outperforming International Oil Titans (via Bloomberg)

U.K.'s services PMI jumps to 60.2 in July (via MarketWatch)

 

Josh Steiner – Financials

#RatesRising 30-Year Mortgage Rates Have Spent 3 Weeks Between 4.3-4.4% (JS note: Our outlook remains higher highs & higher lows … via Bloomberg)

 

Jonathan Casteleyn – Financials

Treasuries Proving Safer Than AAA Two Years After S&P Cut (JC note: I don't think Treasuries are safe but a positively sloped yield curve is one of the most important economic tenets  via Bloomberg)

Bond Salesman Who Wasn’t Reveals RBS Human Errors (via Bloomberg)

 

Matt Hedrick – Macro

Merkel Challenger Says Alienated Voters Are Key to Unseating Her (via Bloomberg)


MONDAY MORNING RISK MONITOR: GOLDILOCKS

Takeaway: Both the short and intermediate term FIG setups remain favorable with very few watch areas currrently.

Key Takeaways:

Last week was another ho-hum week from a risk monitoring standpoint. US financial credit default swaps were essentially unchanged. European financial swaps were broadly improved (average -14 bps). High yield rates were nominally higher (+5 bps), TED spread was nominally lower (-1 bp), Euribor-OIS was wider by 1 bp and the Shifon Index tightened by 30 bps. All this points to a broad-based calm globally. 

 

On a short term basis, the only risk measure that deteriorated was Muni CDS, which rose 4 bps to 95 bps, reflecting modestly higher default expectations as investors re-review pension statuses nationally. On an intermediate term basis, we continue to see a lot of positives. Note the preponderance of green in the middle columns (MoM) of our summary table below. 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 13 improved / 3 out of 13 worsened / 5 of 13 unchanged

 • Intermediate-term(WoW): Positive / 6 of 13 improved / 3 out of 13 worsened / 4 of 13 unchanged

 • Long-term(WoW): Positive / 7 of 13 improved / 2 out of 13 worsened / 4 of 13 unchanged

 

MONDAY MORNING RISK MONITOR: GOLDILOCKS - 15

 

1. American Financial CDS -  The biggest movers last week were the mortgage insurers, MTG and RDN, which saw swaps tighten 33 bps and 20 bps, respectively, to 416 bps and 377 bps. Overall, swaps tightened for roughly half (15 out of 27) of domestic financial institutions. 

 

Tightened the most WoW: MTG, RDN, GNW

Widened the most WoW: AXP, MBI, ALL

Tightened the most WoW: MTG, RDN, GNW

Widened the most/ tightened the least MoM: AGO, MBI, MMC

 

MONDAY MORNING RISK MONITOR: GOLDILOCKS - 1

 

2. European Financial CDS - Last week saw large improvements in French, Greek, Italian, and Spanish swaps. In fact, the only company that saw swaps rise was Sberbank of Russia, where swaps backed up another 14 bps to 238 bps. Sberbank swaps have become increasingly tethered to the outlook for oil prices.

 

MONDAY MORNING RISK MONITOR: GOLDILOCKS - 2

 

3. Asian Financial CDS - Indian banks were notably wider last week, rising 11 - 19 bps across the group. Swaps in Chinese banks were tighter, while Japanese banks were flat to mixed. 

 

MONDAY MORNING RISK MONITOR: GOLDILOCKS - 17

 

4. Sovereign CDS – Last week saw another across-the-board tightening in sovereign credit default swaps. Spain, Italy and Portugal led the improvement with declines of 15 bps, 12 bps and 11 bps, respectively. Ireland and France followed with 8 bps and 5 bps. The U.S., Germany and Japan were all tighter by 1-2 bps. 

 

MONDAY MORNING RISK MONITOR: GOLDILOCKS - 18

 

MONDAY MORNING RISK MONITOR: GOLDILOCKS - 3

 

MONDAY MORNING RISK MONITOR: GOLDILOCKS - 4

 

5. High Yield (YTM) Monitor – High Yield rates rose 5.5 bps last week, ending the week at 6.23% versus 6.17% the prior week.

 

MONDAY MORNING RISK MONITOR: GOLDILOCKS - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 0.6 points last week, ending at 1805.85.

 

MONDAY MORNING RISK MONITOR: GOLDILOCKS - 6

 

7. TED Spread Monitor – The TED spread fell 1.3 basis points last week, ending the week at 23.4 bps this week versus last week’s print of 24.7 bps.

 

MONDAY MORNING RISK MONITOR: GOLDILOCKS - 7

 

8. CRB Commodity Price Index – The CRB index fell -1.4%, ending the week at 284 versus 288 the prior week. As compared with the prior month, commodity prices have increased 0.7% We generally regard changes in commodity prices on the margin as having meaningful future consumption implications.

 

MONDAY MORNING RISK MONITOR: GOLDILOCKS - 8

 

9. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 1 bps to 13 bps.

 

MONDAY MORNING RISK MONITOR: GOLDILOCKS - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 30 basis points last week, ending the week at 3.25% this week versus last week’s print of 3.55%. The Shifon Index measures Chinese banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: GOLDILOCKS - 10

 

11. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1. Last week spreads widened 4 bps, ending the week at 95.3 bps versus 91.1 bps the prior week.

 

MONDAY MORNING RISK MONITOR: GOLDILOCKS - 11

 

12. Chinese Steel – Steel prices in China fell 0.7% last week, or 23 yuan/ton, to 3447 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: GOLDILOCKS - 12

 

13. 2-10 Spread – Last week the 2-10 spread widened to 230 bps, 5 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: GOLDILOCKS - 13

 

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.9% upside to TRADE resistance and 1.2% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: GOLDILOCKS - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

next