Starbucks Corp.

+0.69 (+0.69%)
: $100.63 +0.09 (+0.09%)
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Why Starbucks Could Beat Earnings Right Now



Bloomberg just released an article entitled Jobless Claims in U.S. Fall to Lowest Level in Four Decades. Keep that in mind for this analysis.

Starbucks (SBUX) has earnings due out today (July 23rd) after the market closes. The stock is trading at an all-time high and for good reason. It is the undisputed king of its industry and is one of the top rated fundamental companies in the world. In fact, there are only seven mega companies in all of North America with market caps above $50 billion that have a five star fundamental rating and have bullish momentum. Starbucks (SBUX) is one of them, coming in at number five. Here's the star scan image.

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The company has been called a "marvel" by some (including me) as it grows in an industry that's facing more and more competition. SBUX has "side-stepped" the "bad" big-brand issues by raising wages and continuing to be at the forefront of some pretty cool payment technologies. The company also has a killer social media strategy, which focuses on community rather than spamming. "MyStarbucksIdea" is an on-line community based on crowdsourcing where customers and employees can make suggestions and ideas for new products, improve products and services, and enhance the Starbucks experience. The company has been remarkable in this regard. Just yesterday I got this email:

This allows Lyft drivers and riders that use Lyft's app to earn Starbucks loyalty points (which turn into free drinks and store credit). This is very similar to what SBUX did with Spotify. That's just smart. It shows a company that is in touch with its customers and acts like a small company with respect to relationships and convenience while carrying the might of a mega-cap, mega-brand, mega-player.

The company is also expanding Mobile Order & Pay ( pay ahead so you don’t wait in line platforms) that was first introduced at the end of 2014. Again, perfect example of a huge company understanding its customer base and making them feel taken care of. That’s very "un-big-brand" like in the food industry. It's very "un-big-brand" like in any industry. The product is addictive. The experience is addictive, and thus far, competition has meant nothing. Further growth is expected based both on same store sales and the company's plans to move into global markets, which if SBUX executes as it did in the United States, should be a winner for a decade or more.

SBUX's revenue (TTM) has risen for twenty consecutive quarters, and each time it has been a new all-time high. Earnings are at all-time highs as are operating margins and at the same time, capital expenditures (CapEx) are at all-time highs, while competitors like McDonald's (MCD) are cutting CapEx as quickly as possible. The firm really is a "marvel" and one of what I call "the magnificent seven."

Earnings Estimates

Estimates range between [$4.75B, $4.96B] with the average coming in at $4.86. With a booming job market (relative to the past), I'm not so sure the company doesn't beat those numbers. In any case, a one day bet on earnings is just that, a "bet," it's not an investment. As an investment thesis, SBUX looks very strong.

Earnings per Share (EPS) estimates range between [$0.40, $0.42] with the average coming in at the middle ($0.41). I'm looking for a beat as the company continues to innovate and the job market strengthens. But again, this article is not about a one "bet," it's about a long-term investment thesis.

Technicals   |   Support: 54.05   |   Resistance: $56.69    

Golden Cross Alert:
The 50-day MA is now above the 200-day MA.
Swing Golden Cross Alert: The short-term 10 day MA is now above the 50 day MA.

SBUX has a four bull (high rated) technical rating because the stock is trading above its 10-, 50-and 200- day moving averages and even though the stock is down on the day, the 10-day MA is above the 50-day MA (also called a "swing golden cross").

Let's look at the core elements that drive the company's five star fundamental rating.

Fundamentals Rating Summary

Revenue (TTM US$ Millions) 17,701 15,638 14,010

Operating Margin (QTR) 1.188 1.18 1.16 RISING

Net Income (TTM US$ Millions) 2,579 153 1,514

Levered Free Cash Flow (TTM US$ Millions) 2,104 1,694 1,230 RISING

Capital Expenditures (TTM US$ Millions) 1,264 1,170 1,027 RISING

Stock Returns and Chart

SBUX is up +14.1% over the last three months and up +27.8% over the last six months. The stock price is up +42.5% over the last year. Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).

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Now let's examine the visualizations of the critical financial measures.

Revenue (TTM US$ Millions) 17,70115,63814,010

Revenue (TTM) has increased for 20 consecutive quarters (five consecutive trigger a "trend" and impact the fundamental rating). Revenue over the trailing twelve months (TTM) for SBUX is up 13% year-over-year and up 26% over two-years. The company is expanding through new stores, growing same store sales, through its Teavanna brand and a planned international expansion.

What do all these numbers mean?
SBUX's fundamental rating benefited these results:
1. The one-year change was positive (but no extra points were given for a large percentage increase).
2. The two-year change was positive.
Finally, the five+ consecutive quarters of an upward trend in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below.

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Net Income (TTM US$ Millions) 2,5791531,514

Net Income (after tax profit) over the trailing twelve months (TTM) for SBUX is up to an all-time high of nearly $2.6 billion. Further, earnings (TTM) have been up five consecutive quarters which again triggers our "trend" for the star rating (benefits the rating). The last three consecutive trailing-twelve-month numbers have each broken all-time highs in earnings.

In our next chart we plot Net Income (TTM US$ Millions) through time.

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Capital Expenditures (TTM US$ Millions) 1,2641,1701,027RISING

Capital Expenditures (CapEx) (TTM US$ Millions) is up to $1.26 billion which way into all-time high range. CapEx is up 8% year-over-year and 23% from two-years ago. The CapEx phenomenon has two impacts on the firm. First, let us note that SBUX sees growth possibilities ahead -- the increased CapEx is the evidence of this reality as it spends more to grow more (and that includes internationally). Second, even as CapEx is breaking all-time highs, the company is breaking all-time highs in earnings (net income). That is not a trivial occurrence. Often times increased capital expenditures come at the expense of earnings in the near-term for the promise of earnings in the future. In this case, SBUX is realizing both all-time highs in earnings today and the hope of continued earnings growth in the future.

In our final time series chart we plot Capital Expenditures (TTM US$ Millions) in the blue bars.

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The bullish thesis for Starbucks reads something like this:

The company is the best in its industry and rivals Apple for the best in the world at connecting with its customers in a way that feels meaningful, personal and very much not "big brand." It has formed partnerships with "hip" and relevant companies like Spotify and Lyft simply to help customers earn brand loyalty points.

The company is breaking new all-time highs in revenue and earnings as capital expenditures all hit all-time highs with the goal of turning those expenses into future free cash flow. It has the best social media program of any company in its industry, and possibly of any company in any industry (perhaps with the exception of TD Ameritrade). It's one of only seven companies in North America with a market cap above $50 billion that has the highest five star rating and bullish momentum.

It has side-stepped the "bad parts" of big brand while reaping all of the benefits of it. It flexes its muscle by crowding out competitors with several stores on consecutive blocks in big cities, if not multiple stores on the same block. It understands its customers as well as any other company in the world and caters to their desires while maintaining a wonderful social presence. As I wrote in an article on June 22nd; "Starbucks is simply doing everything right. Period."