New York - Shares of Starbucks are outpacing the broader market amid a decline in global coffee prices spurred by the rain in Brazil.
Starbucks, the world’s largest coffee chain, has outperformed the Standard & Poor’s 500 Index by 17 percentage points since October 14, while arabica coffee for May delivery has fallen 37 percent during the same period. The company’s shares gained less than 1 percent to close Wednesday at an all-time high of $94.26, while coffee futures slid 3.7 percent to close at $1.4345 a pound after touching a one-year low.
There’s a strong, inverse correlation between the relative performance of Starbucks’ stock and coffee prices because this commodity is “one of the biggest inputs” affecting its profitability, said Sara Senatore, an analyst at Sanford C. Bernstein in New York, who maintains an outperform recommendation on the shares. As a result, when prices fall, earnings improve because coffee represents as much as 20 percent of the company’s cost of sales, she estimated.
Coffee is the most-volatile commodity in the past year, driven by changes in weather in Brazil, the world’s biggest producer and exporter. After surging as much as 11 percent to 2015’s high in mid-January, rains in Brazil improved crop prospects and prices are now at the lowest since February 2014. That followed the country’s most-severe drought in decades, which damaged crops in early 2014.
Buying pattern
While Starbucks usually contracts its purchases of coffee beans and pays a premium to the futures-market prices, “when the price is attractive, the company tends to buy more”, Senatore said. “What Starbucks is paying for coffee correlates with what the commodity market looks like.”
Starbucks’ fiscal first-quarter profit rose 82 percent as new food and drink offerings boosted sales and customer traffic rose 2 percent at locations open at least 13 months in the Americas, the Seattle-based company said on January 22. The results were welcome news to investors, particularly the acceleration in traffic, Senatore said. The stock rose 6.6 percent the following day, the biggest gain since July 2013.
With the stock trading at the highest level in more than a year on a relative basis, the fall in coffee prices could further buoy it, particularly after the most-recent earnings report “gave investors some comfort” about the company’s profitability, Senatore said. The relationship with coffee futures is “interesting” to watch, she added.
Bloomberg