Why the Rise in Coffee Price isn't affecting Starbucks?
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Coffee prices had declined during most of the year except for the rally they have had in recent weeks. This rally however coincided with the rise in many other commodities prices such as oil prices. Despite the fall in coffee prices they didn't seem to positively affect the stock price of Starbucks Corporation (NASDAQ: SBUX). It is well known that Starbucks buys its coffee supply a year in advance, but the stock price isn't solely comprised from the changes in the financial results of the company in the current year, it is also affected by future prices that determine the value of the company (assuming you use a DCF valuation process). Therefore shouldn't the fluctuations in the coffee prices affect Starbucks stock price? Let's see what is going on that could explain this discrepancy.
Many traders who follow the stock price of Starbucks know that the company buys in advance its coffee beans for the year. E.g. according to the 2011 financial reports, as of October 2011 Starbucks had a total of $1.0 billion in purchase commitments, of which $193 million represented the estimated cost of price-to-be-fixed contracts. The report goes on and claims that this commitment should be an adequate supply of green coffee through fiscal 2012. This also means that if the coffee price were to go down during 2012, the company wouldn't benefit from it nor would it show this savings in the financial reports for 2012.
Further as seen in the chart below, the stock price of Starbucks doesn’t coincide with the fluctuations of coffee prices.
The linear correlation between the daily percent changes of Coffee (KC01) and Starbucks stock price is very low at 0.09, which isn't significant.
The only problem is that a company's value depends not only on the current cash flow, but also its future cash flow (assuming you are in line with valuating a company via DCF). In such a case the price of coffee, one of the main inputs of the company, should affect the future value of Starbucks and hence affect the current stock price. E.g. If the price of coffee were to tumble down by 50%, and assuming the price of a cup at Starbucks won't decline (after all every time I go to Starbucks the price of a cup doesn't go down despite the fall in coffee prices during last year…) this will raise the company's profit margins in 2013 and thus the company's value should also increase (assuming all things equal).
But as I have pointed out this isn't the case for Starbucks' stock price and the fluctuations in the price of coffee doesn’t seem to coincide with the changes of Starbucks' stock.
There are several considerations that could explain this behavior:
- Traders don't consider the future price of coffee and heavily rely on the current financial results of the company rather than future value;
- The price of coffee is very volatile and changes directions very rapidly so traders don't factor in the changes in coffee prices until Starbucks' closes its coffee positions for the next year;
- Coffee is the most important input of the company but the stock is more affected by the potential growth of the company (growth in the U.S and other countries) rather than the discount it could receive from purchasing coffee;
- Starbucks, much like other vendors, doesn't immediately update its prices even when inputs prices change; this phenomena is known as sticky prices; further I suspect that are only price updates in a one certain direction;
- There are other macro changes that affect the price of Starbucks such as S&P500 which is strongly correlated; during 2012 the linear correlation between the S&P500 and Starbucks is 0.54, which is very strong and robust.
There could be other considerations that could explain the low impact of coffee's price on the company's stock. I think the reality is a mixture of all the above-mentioned considerations. This means that the stock price of Starbucks has less to do with coffee and more with other factors such as the company's growth into other regions in the U.S and other countries. On the other hand, if coffee prices were to resume their decline, this could eventually raise the company's profit margins and help the company's stock price. Final note, this analysis is applicable for other companies that sell coffee such as Caribou Coffee (NASDAQ: CBOU). According to the financial reports of Caribou Coffee (FR of 2011 pg 3) as of January 1st, 2012 the company had committed to buy coffee beans at a total of $69.7 million up to March 2014, which, combined with green coffee bean inventory on hand, represents the compnay's anticipated coffee bean requirements for 2012. Therefore, the decline in coffee prices doesn't seem to positively affect Caribou Coffee's stock price.
This report on Starbucks and Coffee was first published on Trading NRG
For further reading: Coffee Outlook and Analysis for June
This is by no means an investment advice only general market analysis.
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