After hours on 6/19, Starbucks issued a statement setting forth its strategic priorities and announcing the closure of a larger than normal number of locations.
Starbucks’ stock has fallen heavily today on the news, and as I write this, is trading down more than 9% at around $52 / share.
Back in December 2017, we published a valuation model and Waterfall for Starbucks that showed a valuation range from $42 / share to $61 / share, with an average value for all scenarios of $51 / share.
Looking through Starbucks’ second quarter financial statements, we note that revenue growth has been better than our best-case projection, and profitability has been tracking with our worst-case projection. This combination of drivers, coupled with both our best- and worst-case medium term cash flow growth projections (14% and 10% / year, respectively), generate a valuation range between $46 and $54 / share.
Long story short, the good news is that it seems like the market is weighing Starbucks’ value closer to how we weighed it seven months ago.
The bad news is that, in our recently published Covered Call Corner, Thornberg Value Fund had opened a new 2.2% position in Starbucks at a reported price of $57.89, and we followed along and sold covered calls on the company struck at $57.50. Factoring in the call price of $1.87 and an expected dividend of $0.30, our Effective Buy Price is $54.68.
With this EBP, our present unrealized loss on this position — to which we allocated only 1% of capital — is just less than 5%, implying a 5 basis point headwind to our overall portfolio.
I considered selling puts at this level, but looking back at our earlier valuation, decided against it. If I could get an average price in the mid-$40 / share range, I might increase the position size, but considering the valuation risk to the position, I would prefer just to keep the position at its present size and continue to write covered calls on the position if I still own the shares after the 9/21/2018 expiration.