Is it Time to Get Long Starbucks?

No need to get excited, coffee prices are not going down. Or should we say, the price of your morning perk is not going down anytime soon. However, the price of the commodity has been and remains lower. The world, or the world in Canada, has had more buzz recently with the price of oil and its recent decline. We looked a bit deeper in the commodity space and noticed that most, if not all, commodities have been in decline. Coffee caught our eye as the price has declined from $225 to $116. To put this in a bit more simplified terms, the price is down 48%.

Source: VIP Wealth Solutions and Bloomberg

Who would be best positioned to benefit from a decline in the base price of coffee? Perhaps one of the best distributors of coffee and/or coffee related products. The key name that comes to mind is Starbucks. Let’s imagine a simple company where the price of coffee is $2.50 per cup and the underlying variable cost of their raw material (coffee) is $1.00 per cup (factious numbers). Now if we were to cut the raw material cost by 50% to $0.50 what would happen to the profit per cup of coffee?

Now if we put a bit more detail in our graphic above and overlay Starbucks against the price of coffee we get a graph that looks as follows:

Source: VIP Wealth Solutions and Bloomberg

It reminds us that for every action there is sometimes some sort of reaction. In the case study above, as the underlying price of coffee got lower and remains relatively low, the stock price of Starbucks went and remains higher.

 

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