Rethinking the Coffee Merger Candidates (SBUX, GMCR, CBOU, PEET, JVA, FARM, JO)

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We have seen a massive run-up, followed by a tempering of those gains, in the coffee sector.  Some are looking for consolidation to continue.  Others are looking at trying to find the last independent coffee plays out there as a means to scoring the remaining independent plays in the sector.  If one thing is true, the coffee arena has very few companies that can be considered pure-play investments in or around the world of coffee.  We have reviewed some of the basic trends of late and added color if applicable.

Starbucks Corporation (NASDAQ: SBUX) shares recently closed at $39.57 and its shares may have experiences a peaking cycle after such a great run higher.  The Goldman Sachs downgrade to Neutral on valuation recently highlights some of these concerns..  The 52-week price range is $22.24 to $41.11.  Starbucks’ market cap is over $27 billion and the stock trades at about 22-times September-2012 earnings.

Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR) shares recently closed at $89.76 and it rise has been legendary.  The 52-week price range is $26.14 to $96.91.  Green Mountain’s market cap is about $14 billion and Green Mountain trades at about 42-times the September-2012 earnings estimates..

Caribou Coffee Company, Inc. (NASDAQ: CBOU) shares recently closed at $13.25.  The 52-week price range is $8.50 to $14.49.  Its market cap is $291 million. Caribou’s forward price to earnings multiple is 27 and its price to book is 3.34 to 1.

Peet’s Coffee & Tea Inc. (NASDAQ: PEET) shares recently closed at $59.96.  The 52-week price range is $33.20 to $62.86.  Its market cap is $770 million.  Peet’s forward price to earnings multiple is 34.5 and its price to book is 4.7 to 1. With retail and branded in-store sales, Peet’s has always been considered one of the middle-tier players that could end up as part of a larger entity.

Coffee Holding Co.Inc. (NASDAQ: JVA) shares recently closed at $22.37, but this was as high as literally $30 this week already after having been just at $15.00 in the last two weeks.  What a move.  The 52-week price range is $3.62 to $30.98.  Its market cap is $122 million.  The company is thinly followed and its implied forward price to earnings multiple is close to 30 and its price to book is somewhere in the vicinity of 8 to 1 after the sell-off. We consider this one of the last true independent plays in coffee roasting and brands, but the company has always been so small that it ha been unnoticed by investors.

Farmer Brothers Co. (NASDAQ: FARM) shares recently closed at $10.65 after having just been as high as $12 this week.  This has actually been a poor performer this year as its 52-week high was back in December.  The 52-week price range is $8.59 to $18.85.  Its market cap is close to $160 million.  Due to current and projected losses, Farmer Brothers’ has no meaningful number for a forward PE. The company’s price to book is about 1.4 to 1.  This one is in coffee, but investors also have to consider the tea and ‘culinary products’ aspect of the business.

Coffee Trust Sub-Index ETN (NYSE: JO) is the “Coffee-ETN” for investors.  To show just how wild it has been, even at $66.88 it has a 52-week range of $42.72 to $81.13.  This peaked in early May and then lost about one-quarter of its value before the most recent bounce.  Whether or not there is any tracking error depends upon when you evaluate it because the ETN is meant to track unleveraged funds in coffee futures contracts.

Investors love chasing buyout themes and they have loved chasing coffee in years past.  Green Mountain and other roll-ups have only added to this them.  Unfortunately, American investors looking for coffee stocks are getting a smaller and smaller field to choose from.

JON C. OGG

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