It used to be you could walk into any Starbucks and it would be the same. The smooth sounds of Nora Jones or Nat King Cole and the warm call of the handsome leather sofas. The attractive baristas and the girl studying biochemistry also make you feel a little giddy inside. But nowadays you’re likely to have the experience interrupted by a tinny voice over a loudspeaker blaring, “Customer needs assistance in Sporting Goods” and the mood is broken.
Audio Podcast:
An audio podcast of this article is available at: poweropt.com/podcasts/2007_02_25_SBUX.mp3
There are Starbucks just about everywhere these days; they’re in Barnes and Noble, Target Stores and Supermarkets. The real question is: is the experienced cheapened? Will consumers still cough up $5 for a latte while they’re buying their cereal and deodorant? A recent blind study found most Americans preferring McDonald’s coffee to the “burnt and bitter” taste of Starbucks.
The CEO of Starbucks, Howard Schultz, tossed this question around in a recent memo stating the stores “no longer have the soul of the past. Some people even call our stores sterile and cookie cutter.” He went on to say the chains focus on bagged coffee and automatic espresso machines “overlooked the fact that we would remove much of the romance and theatre.”
Starbucks and its competitors:
We may not be ready to go bearish on Starbucks just yet because the CEO was feeling blue, but the news gives us a chance to look at the fundamentals of Starbucks and a few of its competitors.
Looking at McDonald’s (who is dipping its toe into the premium coffee market) and Tim Horton’s (a popular Canadian eatery of about 1/5 the size). As a note, Dunkin’ Donuts is privately held and Starbuck’s owns the Seattle’s Best brand.
Starbucks (SBUX) has a lower debt to equity ratio than the industry average, higher sales growth rate of nearly 22% and earnings estimates remain at about 20%. On the downside, the stock has a price to earnings ratio of over 40 and the analysts are recommending a hold strategy. Sometimes a stagnating stock lends itself to a covered call strategy, we’ll look into possibilities.
McDonald’s, on the other hand looks a little rosier with a P/E of around 20 and an average buy analyst rating. Also, the company’s income growth and profit margin are solidly above the industry average. The earnings estimates continue to trot along at a 10% clip.
You may ask is there a quaint Canadian soup, bakery, coffee and sandwich shop we might consider? Funny you should ask, because Tim Horton’s (THI) might be interesting to look at. However with negative earnings growth and nearly twice the industry average debt to equity, it may be wise to steer clear of Tim Horton’s for the time being.
Competitors:
Competitors for SBUX include: Tim Hortons Inc. (THI), Dunkin’ Brands, Inc. (private), Cosi Inc. (COSI), Krispy Kreme Doughnuts Inc. (KKD), Peets Coffee & Tea Inc. (PEET), and Panera Bread Co. (PNRA).
Potential Trades:
All of the following option trades have 55 days until expiration. Starbucks is currently trading at $32.75 and McDonald’s is currently trading at $46.01. These trades were discovered using the powerful suite of option search tools found at PowerOptions.
| Covered Call – Starbucks Corp. (SBUX) $ 32.75 (55) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| OPTION | Strike Info |
Opt Bid |
% Dnsd. Prot. |
% If Unch. |
% If Asgnd |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SQXDZ | 07 APR $32.5 | $1.35 | 4.10% | 3.50% | 3.50% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Covered Call – McDonalds Corp. (MCD) $ 46.01 (55) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| OPTION | Strike Info |
Opt Bid |
% Dnsd. Prot. |
% If Unch. |
% If Asgnd |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| MCDDI | 07 APR $45.0 | $1.95 | 4.20% | 2.10% | 2.10% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The Starbucks covered call trade, an in the money covered call, offers 4.1% downside protection and a potential profit of 3.5% if the stock remains unchanged or rises. The break-even price of this trade is $31.40. The net cost of this trade, per 100 options, is $3,140.00.
The McDonald’s covered call trade, an in the money covered call, offers 4.2% downside protection and a potential profit of 2.1% if the stock remains unchanged or rises. The break-even price of this trade is $44.06. The net cost of this trade, per 100 options, is $4,406.00.
For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions‘ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.
PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.
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[tags]Nora Jones, Nat King Cole, Barnes and Noble, Target, McDonald, Howard Schultz, Tim Horton, Dunkin’ Donuts, Seattle’s Best, Dunkin’ Brands, Inc., COSI, Cosi Inc., KKD, Krispy Kreme Doughnuts Inc., MCD, McDonalds Corp., PEET, Peets Coffee & Tea Inc., PNRA, Panera Bread Co., SBUX, Starbucks Corp., THI, Tim Hortons Inc., covered call investment strategy, investment strategy, iron condor, poweroptions, stock option trading, stock options[/tags]