Earnings Preview: Chipotle Mexican Grill, Inc. and Starbucks Corporation

Chipotle Mexican Grill, Inc. (CMG) and Starbucks Corporation (SBUX) are preparing to report earnings after the close

Jul 21, 2016 at 12:00 PM
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The earnings calendar has been heating up this week, with several Dow stocks taking the stage -- and helping the blue-chip index to nine consecutive wins so far. Meanwhile, food-and-beverage specialists Chipotle Mexican Grill, Inc. (NYSE:CMG) and Starbucks Corporation (NASDAQ:SBUX) are preparing to report quarterly earnings after the closing bell tonight.

CMG has given up 42.5% of its value over the past 12 months at $417.32, with food-borne illness woes weighing heavy on the shares since October, and its 50-day moving average serving as a tough layer of resistance since March. It seems like the hits just keep on coming, as analysts continue to lower their expectations on the stock. In fact, 17 out of 25 brokerage firms now give CMG a "hold" rating or worse.

Traders haven't shown much optimism toward CMG lately, either, as short interest rose over 23% over the last two reporting periods. All these short positions may also explain a rash of call buying in the stock's options pits, as some bears could be picking up protective calls to hedge against upside risk. Specifically, CMG's 10-day call/put volume ratio across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) stands at 1.25 -- higher than 91% of the past year's readings.

Currently, the options market is pricing in a one-day post-earnings swing of 10.5% for CMG -- wider than the stock's average move of 7% in the session subsequent to reporting over the past eight quarters. Notably, the stock has made moves to the downside in six of the last eight quarters, including the past three in a row.

The stock's options are trading hands at double their typical intraday rate, with puts in the lead. Speculators are placing extremely short-term bets, as the weekly 7/22 series, which expires at the close tomorrow, accounts for seven of the stock's 10 most active options. That said, buyers of near-term options are paying hefty premiums. In anticipation of tonight's earnings report, the stock's 30-day at-the-money implied volatility has risen to 43.2% -- in the 78th percentile of its annual range.

SBUX has been consolidating in the $56-$57.50 region in recent weeks, allowing its ascending 80-week moving average to catch up. Historically speaking, the trendline has supported the shares for the past seven years. The stock is essentially unchanged at $57.54 today, and it's sitting just 1.5% above its year-over-year breakeven level, after hitting a record high of $64 last October.

Yet, sentiment surrounding the shares has been widely optimistic of late. Roughly 72% of analysts following the stock rate it a "buy" or better, without a single "sell" in sight, and its consensus 12-month price target of $67.92 sits in all-time-high territory.

While short sellers have been backing off -- these bearish bets fell by nearly 19% during the most recent two-week reporting period, and now account for just 1% of the stock's available float -- options traders have been upping the bullish ante. At the ISE, CBOE, and PHLX, the security's 10-day call/put volume ratio of 2.48 shows SBUX calls bought to open at more than double the rate of puts over the past two weeks. Moreover, this ratio ranks higher than 89% of all readings in the last year.

While puts are trading at three times their expected intraday rate today, it looks like some positions are being sold to open at the weekly 7/22 54.50 strike. With earnings around the corner, options are pricing in a one-day post-event move of 4.8%, compared to the 2.8% average swing after the last eight quarterly reports. SBUX has swung higher in the session following earnings in five of the past eight quarters, but last period's disappointing quarterly outlook sent the stock gapping lower. In fact, the shares have yet to close that bear gap.

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