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FUNDAMENTAL WALK THROUGH | SBUX

FUNDAMENTAL WALK THROUGH | SBUX - CHART1

 

SBUX reports Q3 2015 earnings after the close on Thursday, July 23, followed by a conference call at 5pm ET.  The consensus is looking for revenues of $4.86 billion, up 17% and EPS of $0.41, up 21%.  We see little upside to current consensus estimates.  

 

We are adding SBUX to the SHORT bench of our Hedgeye Restaurants Best Ideas list.

 

SBUX obviously has significant growth potential, and has had industry leading innovation as of late. But we are growing increasingly concerned by the valuation of the stock, which trades at nearly 2 standard deviations above the five year average EV/NTM EBITDA of 12.9x.  The current valuation more than adequately reflects the company’s long-term growth potential.  That being said, we do have some reservations about the current growth strategy. 

 

Some of the issues on our radar screen are:

  1. We are closely watching the amount of items they are adding to their menu, as they may be overcomplicating it, which if history proves right again, would decrease performance of the stores.
  2. Is the latest round of mobile order and pay improving throughput?
  3. CAP region sales and margin trends.

 

PRICE PERFORMANCE

SBUX shares are up 35.75% year-to-date versus up 3.29% for the S&P 500. One turn on the EV/NTM EBITDA multiple suggest 5.9% upside/downside in the name. 

 

FUNDAMENTAL WALK THROUGH | SBUX - CHART2

 

FINANCIALS

 

SAME-STORE SALES

Looking out to 3Q15, SBUX should achieve its 22nd consecutive quarter of same-store sales growth of 5% or greater, which is an impressive feat given their large store base.  Imbedded in the 3Q15 performance we are looking for management commentary about the Mobile Order & Pay as well as performance of food items across all day-parts.  Same-stores sales will slow sequentially in 3Q15, but traffic trends are estimated to accelerate globally. 

 

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AVERAGE CHECK

SBUX’s margins have benefited from a significantly higher average check.  The check has been rising at a steady 3%-5% for the past five quarters; consensus is expecting these increases to tail off to the 2.5%-3.5% range over the next four quarters.

 

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TRAFFIC

Traffic growth has been historically low over the last five quarters coinciding with the historically high price increases. Management is banking on innovation and Mobile Order & Pay to get traffic back up. The acceleration in traffic is critical at this valuation, especially in the Americas.  Watch out below if traffic decelerates sequentially in 3Q15. 

 

FUNDAMENTAL WALK THROUGH | SBUX - CHART8

 

MARGIN TRENDS

 

RESTAURANT LEVEL MARGINS

Globally, SBUX is expected to see Restaurant Level Margins accelerating, but at a slower rate than in 3Q14. Margins expected to increase 84 basis points YoY to 28.41%, compared to a 205 basis point increase in 3Q14.

 

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OPERATING MARGIN

Globally, SBUX should see operating margin expansion in every region except CAP.  On a consolidated basis, operating margins are expected to be 19.18% in 2Q15, up 68 bps year-over year.  The company should benefit from favorable coffee prices, and supply chain initiatives taking costs out of the system. 

 

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SENTIMENT AND VALUATION

 

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EV / NTM EBITDA

Trading at 16.9x EV/NTM EBITDA the stock is not cheap, and is due for a correction. Long-term we are bullish on SBUX, but we are growing skeptical of the current valuation and product line extensions. For example, if the stock were to drop down to 15x EV/NTM EBITDA, 1 standard deviation above the five year average, it would imply a ~12% decrease to todays price. This is a scenario we believe to be likely, but with the upcoming quarter and current excitement around Mobile Order & Pay we wouldn’t want to get in ahead of the print.

 

POTENTIAL DOWNSIDE

Realistically we see about ~20% downside in this name if our thought process plays out. Before being fully convicted on this idea we need to hear management’s commentary during the Q3 call. Post the call we will give you our higher conviction take on the outlook for the company.

 

FUNDAMENTAL WALK THROUGH | SBUX - CHART18

 

SHORT INTEREST

SBUX’s short interest is low, hovering right around 1% of the float.  There is not a big bet against this company.      

 

SELL-SIDE SENTIMENT

With 79% of the analysts having a buy rating on the stock and zero sell ratings, there is a very strong positive bias to the name.  Given the financial performance of the company for the past two years, the bullish bias appears to be justified. But the future looks murky, as the over complication of the menu has the potential to spell serious trouble.

 

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HEDGEYE RESTAURANTS IDEA LIST

 

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McCullough: Gold vs. Central Bankers?

In this brief excerpt from today's edition of The Macro Show, Hedgeye CEO Keith McCullough is in rare form, pulling no punches on what's currently going on with gold, central bankers and more. 

 

Subscribe to The Macro Show today.

 

 

 


GIS | Green Giant Divestiture is the Worst Kept Secret

General Mills is on the Hedgeye Consumer Staples Best Ideas list as a LONG.

 

The rumors keep rolling in on the expected divestiture of their Green Giant assets. With the latest rumors that Bonduelle is in discussions with Centerview to team up on a bid for Green Giant, reported by Reuters. Bonduelle is a France based company, but owns manufacturing facilities in Canada that co-pack for the Green Giant business.

 

This is further confirmation that GIS is still active in the deal process. After just closing out their fiscal year 2015 at the end of May, teams around the company are freed up to conduct a divestiture. Year-end tends to be a strenuous time at manufacturing companies as its all hand on deck from supply chain and sourcing planning volumes for next year, and finance preparing the numbers. It’s no surprise that the sale process probably got pushed till after the year closed.

 

General Mills needs to divest tired assets, and Green Giant is one of the worst performers in the portfolio and we at Hedgeye will be glad to see it go to someone else. Below is a chart from our GIS Black Book that outlines “the other 28%” of assets that management has labeled as non-core.

 

GIS | Green Giant Divestiture is the Worst Kept Secret - CHART1

 

We hope to see more divestitures come down the pipe, and an acquisition or two to tack some growth onto the portfolio. We predict FY2016 will be a busy portfolio shaping year.


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CHART OF THE DAY: Scary Market Internal > Total US Equity Market Volume

Editor's Note: This is an excerpt and chart from today's Early Look. It was written by Hedgeye CEO Keith McCullough. Click here to learn more and subscribe. 

 

...All the while, the market internals have looked scarier at each of those 3 market peaks. Here’s how yesterday’s looked:

 

  1. PRICE – SPY (SP500) +0.08% yesterday vs. RUT (Russell 2000) -0.52% = bearish divergence
  2. VOLUME – Total US Equity Market Volume (see Chart of The Day) -21% and -24% vs. its 1-mth and 1-yr averages
  3. VOLATILITY – front-month VIX not being able to close below 12 for the 3rd time in the last 3 months

CHART OF THE DAY: Scary Market Internal > Total US Equity Market Volume  - Volume CoDpng

 


Chasing Horses

“A horse never runs so fast as when he has other horse to catch up and outpace.”

-Ovid

 

That’s a great opening volley of a quote for the latest #behavioral book I’ve cracked open, Top DogThe Science of Winning and Losing, by Po Bronson & Ashley Merryman. For those of you with competitive fire, I highly recommend it.

 

In the “Foundations” part of the book, the authors introduce a term called #edgework (“a term borrowed from Hunter S. Thompson’s description of anarchic human experience”). “Edgework stems from the way skilled performance brings control to a situation most people would regard as uncontrollable.”

 

In other words, if you took the Greece, China, and the NYSE halt (amidst a 5-6 week Nasdaq decline) as an opportunity to get really long “new tech” and short everything reflation (Oil, Gold, Russia, Brazil, etc.), you have wicked edgework!

 

Chasing Horses - z 3 cc

 

Back to the Global Macro Grind

 

On the other hand, if you’re like me and you only got one half of that right (avoid #Deflation), you better start interviewing Google (GOOGL), Facebook (FB), and Apple (AAPL) analysts. Non-consensus longs they aren’t – but wow, bros, look at those charts!

 

Forget chasing charts (or horses) for a second and remind yourself what was the last part of the US stock market to stop going up at the 2007 peak. Remember the Cramer’s “Four Horseman” (hint: it included RIMM) in SEP 2007? I do.

 

As a cycle guy, it’s been fascinating (but not surprising) to observe that, at all 3 US economic cycle peaks (2000, 2007, and 2015), the cycle slowing perpetuated #bubble multiples in the growth that Wall Street had left to chase.

 

All the while, the market internals have looked scarier at each of those 3 market peaks. Here’s how yesterday’s looked:

 

  1. PRICE – SPY (SP500) +0.08% yesterday vs. RUT (Russell 2000) -0.52% = bearish divergence
  2. VOLUME – Total US Equity Market Volume (see Chart of The Day) -21% and -24% vs. its 1-mth and 1-yr averages
  3. VOLATILITY – front-month VIX not being able to close below 12 for the 3rd time in the last 3 months

 

I hear ya – using price, volume, and volatility is probably cherry picking data (or something like that). But if you back out the move in the XLK (Tech ETF heavily weighted to names like AAPL and GOOGL) which was +0.5% on the day (and is +5.5% for July-to-date!):

 

  1. Energy Stocks (XLE) deflated another -1.3% yesterday (down -4.9% for July-to-date!)
  2. Basic Material Stocks (XLB) down another -0.9% and is -2.3% to kick off Q3
  3. Russia and Brazil (their stock markets) are -7.4% and -3.3%, respectively, month-over-month

 

Seriously, if you can’t buy “Global Growth” (until they halt Chinese and European stocks) and you definitely can’t buy “reflation” and/or anything linked to commodity inflation expectations – do you blame people for bucking up for apps and ads?

 

I don’t. Those were damn good horses to be riding; especially if you:

 

A)     Sold AAPL at the 2007 #bubble top (and bought it back in 2011 < $35) and/or

B)      Bought the Googler sub $250 in 2011 (when global growth was slowing)

 

I’d ride those cost basis’ all night long!

 

Sadly, save some exceptions, this isn’t the way most people “invest” anymore. In 2011, the same guy who was shorting AAPL and GOOGL was probably buying Gold at $1900. It’s just chart (momentum) chasing. And it rarely ends well.

 

Back to the bearish divergence between the SP500 and the Russell 2000, I think one basic #behavioral factor associated with consensus shorting low and chasing high might explain part of it. Check out the recent move in non-commercial (CFTC) hedging:

 

  1. SP500 (Index + Emini) net SHORT position of -119,980 at the end of last week registered a -1.63x 1YR z-score
  2. Russell 2000 (mini) net SHORT position of -7,553 at the end of last week registered at +1.31x 1YR z-score

 

In other words, since a z-score is a measurement of an observation’s relationship to its sample mean (in this case signaling too bearish at -2 and too bullish at +2), Consensus Macro was too bearish on SPY and too bullish on IWM. So they did the opposite.

 

That tends to happen when people have to hedge out “High-Beta” (as a Style Factor) in their portfolio when big beta stocks are getting smoked (like they did in the 6 weeks prior to last week’s 4 Horsy Ramp). The Russell is “higher beta” than the SP500.

 

All the while though, “Low-Beta” (stay with it) continues to crush “High-Beta” on a 1-3 month duration. And, if beta chasers in Tech/Biotech see a mean reversion (pullback from the highs), I think they’ll ultimately have to chase low-beta this summer too.

 

Our immediate-term Global Macro Risk Ranges (and intermediate-term TREND views in brackets) are now:

 

UST 10yr Yield 2.21-2.46% (bearish)

SPX 2093-2130 (bullish)
RUT 1 (neutral)
Nikkei 209 (bullish)

VIX 11.76-14.53 (bullish)
USD 97.06-98.49 (bullish)
EUR/USD 1.07-1.10 (bearish)
YEN 123.01-125.63 (bearish)
Oil (WTI) 49.46-51.89 (bearish)

Nat Gas 2.65-2.94 (bearish)

Gold 1096-1144 (bearish)
Copper 2.45-2.56 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Chasing Horses - Volume CoDpng


The Macro Show Replay | July 21, 2015

 


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