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Morning Update

After Thursday’s market close Starbuck’s reported fourth quarter earnings that beat expectations and sent that the shares 4.1% higher on Friday. The company reported revenue growth of 11% and EPS growth of 14%, both of which were records. The growth was driven by their Americans and Asian/Pacific stores, which reported same store sales growth of 7% and 11% respectively. Starbucks said this holiday season was its best ever, claiming 1 in 10 adults received a Starbucks gift card and that their limited edition $450 steel gift cards sold out in 6 minutes. After selling out they were selling on eBay for over $1,000. The bullish trading in the stock spilled over to the options market with 1.8 calls trading for every put. However, one option trader was selling calls into the strength against a long stock position.

The trade was the purchase of 120,000 shares at 56.84 and the sale of 1,200 February 60 calls for $0.20. This is a buy-write trade that suggests the trader is bullish on the stock but is willing to take profit and sell his shares at 60 if Starbucks is trading at that level or higher at February expiration. By selling the 60 call the trader has reduced the trade’s downside by $0.20 or reduced his cost basis in the stock to 56.64.

CEO Howard Schultz seems very optimistic about Starbuck’s going forward. Stabucks entered the rapidly growth single-serve coffee market in October with its Verismo machine, and Schultz said “We are deeply deeply committed to becoming the leader in the (single-serve coffee) space domestically and internationally” and “With Verismo we are in the nascent stage of building a multi-billion dollar platform for Starbucks over the long term.” Starbucks appears to have returned to its pre-recession growth levels when it regularly posted same store sales growth of 7% and has a strong outlook for growth going forward. They have successfully created strong brand loyalty through Starbuck’s cards, which account for 15% of purchases and are well positioned to be a top player in the single serve market through VIA, Verismo, and K-Cups. But this trader is keeping expectations reasonable and is happy to take profits on his stock if shares jump another 5.6% to 60 over the next 3 weeks. At 29.1 times free cash flow and a 30.5 PE the stock is not necessarily a value buy here, so the call sales subsidizes the stock purchase a bit while leaving plenty of room for the shares to appreciate on earnings momentum. The buy-write strategy is a great way to play stock that pop on earning that seem somewhat

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