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SBUX: WHY WE ARE CAUTIOUS

Following the 4Q13 earnings call we wrote that SBUX was firing on all cylinders and, in fact, they were.  However, as we published in a note on 12/18, we believe SBUX is beginning to lose some momentum and could struggle in the first half of fiscal 2014.  But before we get into that, we will briefly highlight why we continue to like the long-term prospects of the company.

 

LONG-TERM BULL CASE

The bull case for Starbucks is clear: a strong commodity tailwind, high-single digit same-store sales, expanding margins, an international white space growth opportunity, a recovery in the EMEA segment, and expansion into new segments of the global food and beverage industry are all long-term bullish factors moving forward.

 

For the most part, these levers are still in place and the secular opportunity for the company remains attractive.  Having learned from past experience, we believe management is well prepared to take advantage of this.  To this point, management has made some significant investments in order to capture these opportunities.  The chart below illustrates this point and shows that Starbucks’ return on incremental invested capital has recovered from the lows of 2012.  For these reasons, we remain bullish on a long-term basis.

 

SBUX: WHY WE ARE CAUTIOUS - sbux roiic

 

 

SHORT-TERM BEAR CASE

As we’ve written before, one of the only negatives we found in an otherwise all-star 4Q13 was management’s clear attempt to reign in expectations for FY14 (especially expectations for same-store sales in the Americas).  While we initially viewed this as management’s attempt to simply bring estimates back down to earth, it appears they may have done so for a reason. 

 

Our recent store visits in the Northeast suggest that the holiday season has not been as robust as anticipated.  If this is the case, we believe the trickle-down effect on slowing same-store sales are not yet fully reflected in the current share price.  With revenue growth decelerating, valuation close to a 3-year high and the likelihood that earnings will be revised down over the coming months, we see some short-term downside in the stock. 

 

Below, we visually run through the short-term bear case from a fundamental and sentiment perspective in a series of annotated charts. 

 

 

FUNDAMENTALS

 

SBUX: WHY WE ARE CAUTIOUS - sbux americas sss

 

SBUX: WHY WE ARE CAUTIOUS - sbux emea sss

 

SBUX: WHY WE ARE CAUTIOUS - sbuxx capp

 

SBUX: WHY WE ARE CAUTIOUS - sbux traffic

 

SBUX: WHY WE ARE CAUTIOUS - sbux cost of sales

 

SBUX: WHY WE ARE CAUTIOUS - coffee

 

SBUX: WHY WE ARE CAUTIOUS - sbux operating expenses

 

SBUX: WHY WE ARE CAUTIOUS - sbux other expenses

 

SBUX: WHY WE ARE CAUTIOUS - sbux g A

 

SBUX: WHY WE ARE CAUTIOUS - sbux operating margin

 

SBUX: WHY WE ARE CAUTIOUS - sbux americas operating margin

 

SBUX: WHY WE ARE CAUTIOUS - sbux emea operating margin

 

SBUX: WHY WE ARE CAUTIOUS - sbux cap operating margin

 

SBUX: WHY WE ARE CAUTIOUS - omg

 

SBUX: WHY WE ARE CAUTIOUS - right

 

SBUX: WHY WE ARE CAUTIOUS - sbux price performance

 

 

SENTIMENT

 

SBUX: WHY WE ARE CAUTIOUS - sbux ev ebitda

 

SBUX: WHY WE ARE CAUTIOUS - sbux pe

 

SBUX: WHY WE ARE CAUTIOUS - sbux analyst ratings

 

 

 

Feel free to call with questions.

 

 

 

Howard Penney

Managing Director

 


A Mind/Body Market Connection?

Takeaway: If stock market declines can put you in the hospital, maybe feeling bad (low confidence) really makes you feel bad!

In what must have been a time consuming exercise in data management (even by our standards), a study titled Worrying about the stock market: Evidence from hospital admissions by Joseph Engelberg and Christopher A. Parsons combed through 30 years daily hospital admissions and stock market data.  The authors make a remarkable conclusion on page 27:

 

"Over roughly three decades, we provide evidence that daily fluctuations in stock prices has an almost immediate impact on the physical health of investors."


A Mind/Body Market Connection? - mktfear 

If stock market declines can put you in the hospital, maybe feeling bad (low confidence) really makes you feel bad!

 

Charts and data can sometimes show you something that just doesn't "feel" quite right.  In this case, we are talking about the inverse relationship between medical spending and Consumer Confidence.  It's not new to us, but it's been easy to ignore, despite consistently showing up in multiple analysis across multiple durations and multiple company and economic factors.  

 

So, does a happy consumer go to the mall, while an unhappy one goes to the doctor?  It may be more true than we previously thought.  

 

Check out the chart below.

 

It reveals just how tight the relationship is. Specifically, that changes in Consumer Confidence lead Medical Utilization by 2 to 3 quarters.  The trajectory forecasts accelerating medical utilization for 2014.

 

A Mind/Body Market Connection? - tobin

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European Banking Monitor: Still More Good Than Bad

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 .

 

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European Financial CDS - Most of Europe's banks saw their swaps tighten last week but Greek banks were notably wider with Alpha Bank and National Bank of Greece tacking on 24 and 38 bps, respectively. Italian banks continue to show the greatest improvement on a month-over-month basis. 

 

European Banking Monitor: Still More Good Than Bad - z  banks

 

Sovereign CDS – Sovereign swaps tightened across the board last week. Portuguese, Italian and Spanish swaps tightened the most, falling 29, 21 and 19 bps, respectively. 

 

European Banking Monitor: Still More Good Than Bad - z. sov1

 

European Banking Monitor: Still More Good Than Bad - z. sov2

 

European Banking Monitor: Still More Good Than Bad - z. sov3

 

Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps to 13 bps. 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. 

 

European Banking Monitor: Still More Good Than Bad - z. euribor

 

Matthew Hedrick

Associate

 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%

Forbes 30 Under 30: Kevin Kaiser

Takeaway: Congrats to Hedgeye's Kevin Kaiser.

Forbes 30 Under 30: Kevin Kaiser - 30banner

 

Forbes 30 Under 30: Kevin Kaiser - 30kaiser

Click here to continue reading on Forbes.


(CORRECTED) MACAU JANUARY PROJECTION

Macau is off to a strong start, albeit only 5 days of data with average daily table revenues of HK$1,057MM up 19% over the comparable week last year.

 

 

We are currently projecting full month gross gaming revenues (GGR) of HK$32.0 to HK$33.5 billion or +23-28% growth YoY.  This is probably more aggressive than the Street.  Our model takes into account seasonally adjusted sequential trends and other adjustments and has proven to be more accurate, in our opinion.

 

Last January, GGR increased only 7% on slightly below normal hold with VIP revenue actually declining YoY.  Chinese New Year falls on January 31st in 2014 versus February 10th last year.  Most of the gaming business associated with the celebration typically occurs beginning on “New Year’s Eve” and for the subsequent 10-14 days.  January 2014 should get a slight boost over 2013 but not much on a relative basis since most of celebration falls in February of both years. 

 

Market shares are in the 2nd table but are meaningless after only 5 days of data.  We continue to expect LVS to be the biggest share gainer in the coming months with Wynn Macau also increasing share, particularly on the Mass side.  SJM, MGM, and MPEL could be at risk for minor share loss.

 

(CORRECTED) MACAU JANUARY PROJECTION - m1

 

(CORRECTED) MACAU JANUARY PROJECTION - m2


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