JVA: Next M&A Target

Written by GSCR Staff   
Monday, 17 December 2012 09:23

Almost 5 months ago to the day, we did a whole blog on buying coffee stocks. The retailers, equipment producers, etc.

They went on a tear, and back off, went on a tear and backed off.

Well, they will go on a tear again today and here is how to play it.

Caribou Coffee (NASDAQ – CBOU - $12.32), the 2nd largest coffee shop retailer in the U.S. is going private. They will be bought for $16.00 a share in cash. That represents a premium of 30% from Friday’s close. Obviously the stock will be up big today.

Also up big will be Starbucks (NASDAQ – SBUX), Green Mountain Roasters (NASDAQ – GMCR) and Coffee Holding (NASDAQ – JVA - $7.01). We featured it at a price of $5.75 and it is already indicating it will open about 10% higher than its close on Friday. Seems like the next logical play for M&A. Here is the 411:

JVA has been around for around 30 years and is essentially a family business that engages in wholesale and private label production, marketing and distribution of coffee.  The Company is expected to earn $0.60 for the year ending October 2012 and $1.00 next year, on just under $200M in annual sales.  That is huge growth and even with a move higher, is a very low valuation

Plus, the stock pays a dividend of around 1.75%.  While still a small fish in a big pond, the current valuation of 12x this year’s EPS and 7.x next year’s EPS projection is just too cheap.  That compares with skyrocketing valuations for other coffee stocks.  So, even just based upon fundamentals, JVA looks like a piping hot play.  We should note that there is a decent-sized short position(20% of the float) that will likely start covering today, buoying the stock price.

I could see this going to $10 as new attention is on the company.

Let us not forget about CBOU. It will likely trade close to the $16 level today. In addition to playing JVA, we recommend a little M&A arbitrage by buying CBOU. You may only get a few percentage points out of the deal but it is almost a riskless transaction.

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stocks mentioned within the next 48 hours.

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