Question: Is now a good time to invest in coffee-related stocks?

Bull's Response
It's been a smoking hot summer. AccuWeather says last summer was the hottest since 1936 and this summer could be even hotter. Coffee lovers in the Midwest and most other parts of the country are having less warm drinks and more iced lattes. What that means for coffee stocks is hard to say. For every bad piece of news that comes out about the coffee business, there's a snippet of good news. I for one have a glass that's half-full and believe now's a good time to make a coffee investment. Here's why.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Coffee Icon Acquired
Speculation is rampant why Germany's Reimann family is acquiring Peet's Coffee & Tea (Nasdaq:PEET) for almost $1 billion. Bart Becht, Chairman of Joh. A. Benckiser, the Reimann's personal investment company, suggests JAB is "committed to owning and investing in companies with strong, premier-quality brands..."

Becht, who also happens to be the former CEO of Reckitt Benckiser, was probably eager to do something big after JAB's Coty subsidiary pulled out of its $10.7 billion takeover of Avon Products (NYSE:AVP) in May. My personal feeling is that JAB is interested in growing the brand's packaged goods business and not the retail side of things. With only 196 stores in America and margins not nearly as strong as the grocery store business, it makes sense to sell the retail to someone who can use those locations. Whatever the motivation, the Reimann's feel Peet's enterprise value is worth almost 21 times EBITDA. If that doesn't suggest the coffee business is still attractive, nothing does.

SEE: A Clear Look At EBITDA

Stores to Double
Earlier in the year Dunkin Brands Group (Nasdaq:DNKN) announced its Dunkin Donuts brand was doubling the number of stores in the U.S. from 7,000 today to over 14,000 by 2032. According to market research firm IBISWorld, Americans, on average, consume seven pounds of coffee per person each year. It's this kind of number that has Dunkin reaching beyond its New England stranglehold. Trailing Starbucks (Nasdaq:SBUX) by almost 10% market share (23% to 32.6%), it obviously feels like there's plenty of business to go around. I would have to agree.

Fourth Quarter
The expectations are so high for Starbucks that its stock dropped almost 10% this past Friday, its biggest decline since August 18 of last year. The reason for the slide on a day when the Nasdaq was up 2.24%? It guided fourth quarter earnings down two cents to 45 cents, three cents worse than analyst estimates. CFO Troy Alstead believes the consumer is very concerned about the economy and spending accordingly. In addition, Starbucks is taking it on the chin in Europe and that could continue for a very long time.

Nonetheless, business is still good. Third quarter same-store sales grew 6% globally and 7% in the Americas, with net income up 19% to 43 cents a share. There are going to be bumps in the road but this points out just how strong the coffee business really is. Starbucks, which in my estimation is a better company than Peet's, has a current enterprise value that's 15.4 times EBITDA, 25% less than Peet's valuation.

SEE: Equity Valuation In Good Times And Bad

Trading Down
Some believe that weakness at Starbucks is an indication that coffee lovers are trading down to brands like Dunkin, Caribou Coffee (Nasdaq:CBOU) and Tim Hortons (NYSE:THI). As mentioned earlier, there's plenty of business to go around. Tim Hortons' 721 U.S. locations achieved Q1 same-store sales of 8.5% against strong numbers the year before.

Growing its U.S. store count by 27% in the last two fiscal years, the 196 Peet's locations, which are primarily in the western half of the country, would definitely come in handy. As for Caribou, it recently hired Leigh Anne Snider as its Senior VP of Retail Operations. Most recently, Snider was COO for the Long John Silver and A&W Brands until Yum! Brands (NYSE:YUM) sold the two chains in late 2011. Snider brings years of experience to a chain with almost 500 company-owned locations. To get over the hump, it's going to need more top-notch talent. Snider signing on is a sign that coffee's still got some kick.

SEE: Trading The Soft Commodity Markets


Coffee Prices
In the second quarter, they dropped 6.8% on concerns of weak consumer demand. While Brazil is in the midst of a bumper crop, a heat wave gripping most of North America has demand relatively benign. Coffee consumption since 2000 has increased by 2.5% annually. In 2011, that dropped 80 basis points to 1.7% as consumers in places like the U.K. drastically curtailed their coffee intake. As long as coffee consumption continues to grow and coffee prices stay moderate, publicly traded coffee businesses have an opportunity to grow more profitably. If demand were to overheat, profit margins would be immediately tested. The conditions at present, assuming the global economy gets no worse, are actually quite favorable.

SEE: The Real Cost Of Drinking Coffee

The Bottom Line
Coffee's getting a bad rap these days because Green Mountain Coffee Roasters' (Nasdaq:GMCR) stock has fallen off a cliff. Down 51% year-to-date thanks to a number of gaffes, including working a deal with Starbucks when they had to know it was going to develop its own machine and pod design was simply short sighted. The coffee business is a good one and if Green Mountain can stop shooting itself in the foot, it too has a reasonably solid future.

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

Don't forget to read the Bear Side of this debate and weigh in with your opinion below.

Related Articles
  1. Stock Analysis

    Fortinet: A Great Play on Cybersecurity

    Discover how a healthy product mix, large-business deal growth and the boom of the cybersecurity industry are all driving Fortinet profits.
  2. Stock Analysis

    2 Catalysts Driving Intrexon to All-Time Highs

    Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects.
  3. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  4. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  5. Markets

    Why Gluten Free Is Now Big Business

    Is it essential to preserving your health, or just another diet fad? Either way, gluten-free foods have become big business.
  6. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
  7. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  8. Investing Basics

    Why do Debt to Equity Ratios Vary From Industry to Industry?

    Obtain a better understanding of the debt/equity ratio, and learn why this fundamental financial metric varies significantly between industries.
  9. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  10. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!