Unusual Options Volume Bolsters Starbucks’ (SBUX) Slow-and-Steady Approach

At first glance, Starbucks (SBUX) does not give the impression of a particularly compelling upside investment. That’s not to say that it compels in the other direction. Rather, in a diplomatic sense, the coffeeshop giant presents a ho-hum narrative. Yes, the brand has become a fixture of American capitalism. At the same time, consumer economy pressures may hinder SBUX stock.

Perhaps the company’s latest earnings report epitomized the seemingly mundane framework undergirding the coffee juggernaut. According to Zacks Equity Research, Starbucks missed its fiscal first-quarter earnings estimate, which called for 77 cents per share.  Instead, SBUX only managed to post 75 cents per share.

As well, Starbucks missed on the top line. The company rang up $8.71 billion in revenue, missing the consensus target by 1.04%. As Zacks noted, the company topped consensus revenue estimates just once over the last four quarters.

While this might sound like a great excuse to dump SBUX stock, it doesn’t represent the whole story. As another Zacks article mentioned, “both top and bottom lines increased year over year.” In terms of adjusted earnings per share, the lift amounted to 4.2%. For sales, Starbucks improved by 8.2% against the year-ago quarter.

Enticingly, SBUX stock also represented a highlight for Barchart.com’s screener for unusual stock options volume. Following the close of the Feb. 22 session, total volume for SBUX options reached 165,534 contracts against an open interest reading of 660,782. Relative to the trailing one-month volume level, the delta compared to Wednesday’s volume came out to 81.69%.

Drilling into the details, call volume hit 148,896 contracts against put volume of only 16,638. In turn, the put/call volume ratio sunk to 0.11, thereby on paper significantly favoring the bulls. Below are three reasons why SBUX stock may be a worthwhile investment.

SBUX Stock Benefits From Brand Power

As with any consumer-focused brand, the trade-down effect poses a serious challenge for even mighty SBUX stock. Because Starbucks represents a discretionary blend of coffee, it’s easy to find a cheap alternative. From caffeinated soda to coffee consumers can brew at home, people can always trade down to lower-cost options.

However, industry publication Marketing Week quoted Starbucks CEO Howard Schultz, who said, “[o]ur sales, traffic and customer trends all point to the expanding power of the Starbucks business and brand.”

Here’s the kicker – the above statement came from an article published on April 28, 2011. While it’s an old article, the sentiment of brand power still undergirds SBUX stock. Back then, the Great Recession crimped consumer sentiment. Today, the post-pandemic recovery effort and its myriad ills – particularly historically high inflation – hurt the collective wallet.

Yet as Starbucks’ latest earnings report revealed, on a year-over-year basis, the company continues to expand despite the troubles. Thus, the proven brand power could once again bolster SBUX stock.

Workplace Normalization Cynically Lifts Starbucks

If any silver lining exists from the otherwise terrible COVID-19 pandemic, it broadcasted to the nation the benefits of work-from-home initiatives. To be sure, many enterprises have begun taking back those privileges, requiring their employees to return to the office. Inherently, some worker bees put up a fight, setting off a conflict between management and the rank and file.

Fundamentally, this tension logically favors upper management. For one thing, corporate ingrates fail to understand that big business is not a democracy. If workers don’t like their employment situation, they’re free to seek new employment elsewhere or start their own business. Second and most importantly, individual workers just don’t have the funds to remain indefinitely obstinate.

However, Starbucks provides good news. As a provider of America’s caffeine fix, the brand can make the return to the office a bit more tolerable. Plus, the fact that they’re working means that they can theoretically afford the high ticket price.

Solid Value Proposition

Surely, no one will mistake SBUX stock as an exciting opportunity. For instance, based on an analysis of Starbucks’ discounted cash flow (DCF), the company pings somewhere around fairly valued. Put another way, SBUX won’t make you rich but it probably won’t leave you penniless either.

That said, Starbucks offers significant advantages. For instance, its three-year revenue growth rate stands at 9%, outpacing nearly 85% of the competition. Further, its net margin pings at just over 10%, beating out over 87% of its rivals. As well, its return on asset hit 11.67%, reflecting a high-quality enterprise.

Finally, SBUX gets some love from Wall Street. Per Barchart.com, the current analyst assessment is “moderate buy,” breaking down as nine strong buys, one moderate buy and 13 holds. Per TipRanks, the average price target among experts pings at $114.50, implying 9.29% upside potential. Combined with its forward yield of 2.02%, SBUX stock offers a solid investment opportunity.

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