Pipin' Hot Stocks

Written by GSCR Staff   
Tuesday, 31 July 2012 09:03

As I sit here drinking my coffee before the market opens it is obvious to me that since it was announced last week that Peet’s Coffee (NASDAQ – PEET) was being acquired for a big premium, coffee stocks have begun to go under some accumulation. So, we performed some back-of-the-envelope due diligence and have come to the conclusion that continued consolidation could indeed occur.

Coffee Holding (NASDAQ – JVA - $5.75) 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 $0.41 this year and $0.76 next year, on just under $200M in annual sales.  That is huge growth.  Plus, the stock pays a dividend of around 2.5%.  While still a small fish in a big pond, the current valuation of 14x this year’s EPS and 7.1x 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 that may have begun covering, buoying the stock price.

Another M&A candidate, and one more likely than JVA, is Caribou Coffee (NASDAQ – CBOU - $11.08).  The stock trades at 22x this year’s EPS and 18x next year’s EPS forecast.  However, with revenue that is twice that of JVA, plus hundreds of stores and a distribution agreement with other players make it attractive for a firm seeking product and shingles.  This is a pure M&A play, though, not a valuation one.

Finally, Green Mountain Roasters (NASDAQ – GMCR - $18.20) is an interesting bottom fishing candidate.  The stock had a huge sell-off this year but it looks like the worst is over.  GMCR produces 200 different varieties of coffee but has no storefront, per se, though products are ubiquitous.  The valuation of 6-7x this year’s and next year’s EPS is a joke, but reflects pessimism that the stock can actually achieve these numbers.  Plus, packaged good products like these sometimes have low multiple.  Clearly, the Starbucks (NASDAQ – SBUX) and Dunkin’ Donuts (NASDAQ – DNKN) of the world are the beasts of the space and have nosebleed types of P/E multiples.  Maybe they can buy these companies on the cheap add them to their stable?  Or, perhaps another private equity firm sees value here.

Regardless, JVA and GMCR on their own merits appear attractive while CBOU is a pure-play M&A buy, in our view.

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