The question now, of course, is whether Kraft Foods Inc. (NYSE: KFT), maker of Maxwell House and Gevalia brands among others, Starbucks Corp. (NASDAQ: SBUX), Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR), Peet’s Coffee & Tea Inc. (NASDAQ: PEET), and Coffee Holding Co. Inc. (NASDAQ: JVA) will follow suit. Kraft would seem like a good bet to lower prices to compete in the retail space, but the premium coffee roasters are more likely to leave prices where they are as long as they can in order to make a little extra margin.

Last week’s price for arabica beans was about $1.90/pound. A year ago the price was just over $3.00/pound. Robusta (cheaper) beans currently cost about $1.14/pound, about 10% below the five-year high of $1.26/pound set last June.

A continued decline in arabica prices may force the premium roasters to lower prices because the story will hit the headlines and consumers will start making some noise about being gouged by the coffee companies. But that day is a ways off yet. But imagine, both gasoline and coffee prices falling at the same time. What an idea!

Paul Ausick

The unofficial closing bells put the DJIA up nearly 157 points to 12,862.23 (1.23%), the NASDAQ rose nearly 46 points (1.61%) to 2,905.66, and the S&P 500 rose 1.46% or more than 19 points to 1,344.90.

There were several analyst upgrades and downgrades today, including Marathon Oil Corp. (NYSE: MRO) cut to ‘hold’ at Argus; Peet’s Coffee & Tea Inc. (NASDAQ: PEET) raised to ‘outperform’ at Baird; Research in Motion Ltd. (NASDAQ: RIMM) cut to ‘underperform’ at Jefferies; Urban Outfitters Inc. (NASDAQ: URBN) raised to ‘buy’ at Janney Capital; and Chesapeake Energy Corp. (NYSE: CHK) started as ‘neutral’ at Credit Suisse.

Earnings reports since markets closed last night have led to some price changes as of the last half hour of trading today: Gilead Sciences Inc. (NASDAQ: GILD) is up more than 11% at $54.83 after posting a new 52-week high of $54.90 earlier (see our coverage here); Genworth Financial Inc. (NYSE: GNW) is up more than 13% at $9.12; PC Connection Inc. (NASDAQ: PCCC) is down nearly -20% at $10.22; Novellus Systems Inc. (NASDAQ: NVLS) is down -0.73% at $48.98, but posted a new 52-week high of $49.92 earlier in the day; PerkinElmer Inc. (NYSE: PKI) is up more than 6% at $26.21; Beam Inc. (NYSE: BEAM) is up 2.4% at $54.28; Estee Lauder Cos. Inc. (NYSE: EL) is down -3.64% at $56.71 (more coverage here); and Weyerhaeuser Co. (NYSE: WY) is up more than 5% at $21.19.

Other standouts from today include the following stocks:

Threshold Pharmaceuticals Inc. (NASDAQ: THLD) is up nearly 115% at $2.77. The pharmaceuticals firm has announced a global development deal with Germany’s Merck.

Tudou Holdings Ltd. (NASDAQ: TUDO) is up nearly 19% at $16.66. The Chinese online video company has signed a deal with Sina Corp. (NASDAQ: SINA) to provide a video platform for Sina Weibo, a Twitter-like social site.

Zoltek Cos. Inc. (NASDAQ: ZOLT) is up nearly 39% at $13.14. The specialty fibers maker posted good earnings number and forecast continued growth in the market for wind turbines which use its carbon fibers in blade construction.

STR Holdings Inc. (NASDAQ: STRI) is down nearly -20% at $9.08. The company manufactures materials used in solar PV modules, and lowered its fourth-quarter guidance this morning.

Mannkind Corp. (NASDAQ: MNKD) is down nearly -13% at $2.15 after posting a new 52-week low of $2.14 earlier. The biotech company has priced its public offering of units containing one share of stock and warrant to purchase another 0.6 shares. More coverage here.

Stay tuned for Monday. We have noted the following events on the schedule (all times Eastern):

• 11:30 a.m. – 3- and 6-month Treasury bill auction
• 3:00 p.m. – Treasury STRIPS

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Have a great weekend.

Paul Ausick

Apache Corporation (NYSE: APA) Started as Outperform at Credit Suisse.
BB&T Corp. (NYSE: BBT) Raised to Equal-Weight at Barclays.
Cablevision Systems Corporation (NYSE: CVC) Cut to Underweight at JPMorgan.
Chesapeake Energy Corporation (NYSE: CHK) Started as Neutral at Credit Suisse.
Darden Restaurants, Inc. (NYSE: DRI) named Bear of the Day at Zacks.
Eastman Chemical Company (NYSE: EMN) named as Value stock of the day at Zacks.
Edwards Lifesciences Corporation (NYSE: EW) Cut to Market Perform at Wells Fargo.
Marathon Oil Corporation (NYSE: MRO) Cut to Hold at Argus.
Noble Energy Inc. (NYSE: NBL) Started as Outperform at Credit Suisse.
Peet’s Coffee & Tea, Inc. (NASDAQ: PEET) Raised to Outperform at Baird.
Research in Motion Ltd. (NASDAQ: RIMM) Cut to Underperform at Jefferies.
Royal Bank of Scotland (NYSE: RBS) Cut to Hold at Deutsche Bank.
SLM Corp. (NYSE: SLM) named as Bull of the Day at Zacks.
Urban Outfitters, Inc. (NASDAQ: URBN) Raised to Buy from Neutral at Janney Capital.

If you enjoyed the top analyst calls, you can sign up in the box below to join our morning email list to receive news directly in your inbox each morning. We include major analyst upgrades and downgrades, IPO and M&A news, special situation developments, observations on Warren Buffett and key market gurus, as well as special exclusive feature stories.

JON C. OGG

Green Mountain Coffee Roasters, Inc. (NASDAQ: GMCR) is often considered a rival despite the K-Cup relationship now. The downstream companies to watch after Starbucks reports earnings are Peet’s Coffee & Tea, Inc. (NASDAQ: PEET) and Caribou Coffee Company, Inc. (NASDAQ: CBOU).  Peet’s is up more than 50% off of its year lows and Caribou has roughly doubled from its year lows.

The company slowed its domestic growth massively in its turnaround, it has committed again to price hikes, and now it is even targeting the after-work crowd by offering beer, wine, and premium food items on a test basis in a few spots in America later this year.  That effort is too soon to judge.  Even a logo change had no negative impact.

Thomson Reuters has estimates of $0.49 EPS versus $0.45 a year ago, and revenue estimates are expected to be up more than 11% at $3.29 billion.  Estimates for the current quarter due in about 90 days are $0.38 EPS versus $0.34 a year earlier and on sales growth of almost 12% to $3.12 billion.

The chart offers little read for guidance since the stock hit all-time highs lately.  The moving average to watch are as follows: 20-day at $47.04; 50-day at $44.86; and 200-day at $39.81. 

Options traders appear to be braced for a move of up to about $1.40 or so in either direction if you use the February expiration.

As far as analysts and the current price of $47.78, the consensus target from Thomson Reuters is $48.71 and the 52-week range is $30.75 to $48.39.  Our take is that valuations are reaching a point that analysts may downgrade the stock on valuation unless the company blows the doors off the handle.

Still, this one has gone above and beyond what we expected as a peak value.  Thomson Reuters has September year-end estimates of $1.83 EPS for 2012 and $2.23 EPS for 2013.  That generates non-GAAP ratios of 26-times expected earnings for this year ahead and 21.5-times expected 2013 earnings.

JON C. OGG

The deal with Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR) has so far supposedly been to the advantage of Starbucks.  If you have watched the shares fall from the meteoric rise in Green Mountain and compare this drop to the rise of Starbucks it would seem obvious as to who won out in the deal.

Even the threat from smaller players like Caribou Coffee Company, Inc. (NASDAQ: CBOU) and Peet’s Coffee & Tea, Inc. (NASDAQ: PEET) never did mount that full on assault that many thought might occur.

Starbucks has also pledged to grab even more retail shelf space, it has decided to grow its business internationally while only making opportunistic moves in America, and the company has started to reward shareholders with dividends.  Howard Schultz engineered a nearly perfect turnaround.

With shares having gone above the $45.00 mark today, this one is still north of our own internal comfort zone in share prices.  We are apparently too conservative by our prices though because Thomson Reuters has a consensus price target objective of $46.57.  With a consensus fiscal target of $1.83 EPS for the September-2012 year, Starbucks trades at almost 25-times its annual expected earnings.

Starbucks is up over 3% at $45.05 and the high for the day was $45.15.  The prior 52-week trading range is $30.75 to $45.00.

JON C. OGG

So… What are investors to think when a top shareholder files to sell shares?  Simple, they think that the easy gains have already been seen.  Caribou shares closed at $17.05 on Friday and the 52-week trading range was $8.50 to $17.40.  Yep, no bear market victim there.

As of July 3, 2011, Caribou had 554 coffeehouses, including 147 franchised locations, located throughout 20 states, District of Columbia, and nine international markets.

Caribou Coffee announced that an offering of up to 5.15 million shares by a selling shareholder, Caribou Holding Company Limited under the affiliate of Arcapita Bank B.S.C., is going to sell the shares and it is also granting underwriters an overallotment option for up to 772,245 additional shares.  Investors know that ‘insider sales’ mean that none of the funds will head to the company.

There can really be no shock that Caribou shares are down over 8% at $15.64 today.  What is interesting is that Caribou is acting as a sector leader today rather than a second-tier outfit.  Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR) is down 0.75% at $102.80, but Starbucks Corporation (NASDAQ: SBUX) is actually up with the market by 1.1% at $37.78.

Peet’s Coffee & Tea Inc. (NASDAQ: PEET) is another one of the last men standing after the coffee wars and its shares are down 1.1% at $56.63 today.

JON C. OGG

Green Mountain delivered another stellar cup of java to investors in May, with sales and operating income for its second quarter ended March 26 up 101% and 198% over the prior year to $647.7 million and $119.6 million, respectively. Yet robust operational metrics belie two troubling trends: growing debt load on the balance sheet and an inability to convert profits to sustainable growth in cash flows.

The company produces and sells coffee makers and more than 250 varieties of specialty coffees, cocoa, teas and other beverages. In recent years, growth has been overwhelmingly driven by consumers’ enthusiastic adoption of the company’s patented Keurig’s K-cup brewing system, which lets people brew single-cup, gourmet coffee at home or at work in less than a minute without the hassle of grinding beans, measuring coffee, handling filters or cleaning up.

Consumer research has consistently demonstrated people like the way their coffee tastes when brewed in a Keurig single-serve pod. Green Mountain manufactures and sells the top five gourmet single-cup brewing systems in the U.S., accounting for almost 25% of total coffeemaker unit sales for fourth-quarter 2010, according to The NPD Group. Unlike rivals, Keurig’s patented “injected brewing process” directs the coffee away from the center, producing a strong, flavorful cup of coffee.

K-cup in the driver’s seat

Organic growth is being driven by sales of namesake coffee K-cup portion packs and third-party licensed royalty sales ($0.064 on every single-serve K-cup sold), according to regulatory filings. In the second quarter, net K-cup sales totaled $411.8 million, up 94% (or $199.1 million) compared to the same period in 2010.

This “blades to Gillette” razors growth strategy has required the company to aggressively discount its single-cup brewer machines (slightly below cost) in order to rapidly build a sustainable user-base. An entry-level, one-cup coffee maker from Keurig — or a competitor like (Kraft-owned) Tassimo — is currently priced around $100; the cartridge for each cup is about 65 cents, according to Quick-cup Digest.

In the second quarter, Green Mountain sold 1.2 million Keurig brewers, down from 1.4 million in first-quarter 2011.

Expanding its roasted offerings and geographic footprint is proving to be capital intensive: In the last two years, the company spent almost $1.4 billion to acquire a distribution network, including the May purchase of California-based retailer Diedrich Coffee ($305 million) and the December 2010 acquisition of Canadian coffee roaster Van Houtte (for $908 million).

Keurig owns approximately 80% of the single-serve market in North America. A rapid build-out to own this market, however, is straining an already bloated balance sheet:

• Although most loan obligations don’t come due until 2015 and beyond, debt outstanding increased to $1.06 billion in March, up from $354.5 million last September. Corresponding quarterly interest expenses year-on-year have risen from about $900,000 to almost $16.8 million.
• As a result of recent acquisitions, intangibles (customer relationships and trademarks) and goodwill (excess of purchase price over valuation) now total $1.4 billion, or 52.4% of total assets, up from $606 million, or 44.2% last year. Of concern, Green Mountain might have over-paid to muscle-in on Canadian markets. Goodwill associated with the purchase of Van Houtte was some $472 million — flat coffee sales at the Montreal-based coffee roaster hint at the aroma of an asset write-down in coming quarters, in my opinion, depressing shareholder value.

The company is scaling operations to stay ahead of brewer and K-cup demand. Capital expenditures in the first half of fiscal 2011 doubled to $99 million, due to start-up of new, higher- speed package lines in Tennessee, Vermont, Washington and Toronto. In total, management currently anticipates it will need to invest approximately $275.0 million to $305.0 million in new equipment and distribution channels to meet soaring demand for its K-cup portion packs during fiscal 2011.

With Keurig single-cup coffee brewers in only about 7% to 9% of U.S. coffee drinking households, management and investors remain giddy on growth prospects: The share price of its common stock has soared more than 230% in the last year. Ergo, elevated financial leverage is viewed as a necessary evil.

From coffee to tea, cider and cocoa

Chief Executive Larry Blanford told analysts at a William Blair “Growth Stock” conference last month, too, that the company has plans for broadening capacity output: leveraging its installed Keurig-user base to sample and adopt other beverage offerings, from iced coffees and teas to hot apple ciders and cocoa. Two additional plants are expected to come online in 2012. These initiatives will require millions more in capital — lofty ambitions for a company with only $35 million in cash. (A recent stock offering that raised some $680 million is being used to refinance and pay down some of the debt associated with the Van Houtte purchase.)

Given incessant need for growth capital, expect more debt to be issued and more red ink to flow. Trailing 12-month free cash flow was a negative $114 million.

The company’s rapid growth has exposed disturbing internal weaknesses in financial accounting. In fact, every financial report issued by Green Mountain and certified by PricewaterhouseCoopers from 2007 to 2010 had to be restated because of accounting errors (such as, overstatements of income!). Well-known corporate gadfly (and the “reformed” convicted felon) Sam Antar is also calling into question current earnings performance and management credibility, believing recent quarterly earnings received an artificial boost from a reversal of sales return reserves.

Notwithstanding legitimate transparency concerns, closer scrutiny of the company’s balance sheet also suggests cash flow isn’t the only metric conspicuously absent from alleged profitability gains: In the last six months, shareholder equity has soared 49.4% to $1.04 billion. Most of these gains, however, resulted from issuance of new stock — not from additions to retained earnings.

Protective retail-distribution deals

In recent months, Green Mountain has thwarted potential competitive threats to its leadership position in the single-serve coffee business by signing retail distribution deals with nationally recognized brands like Dunkin Donuts and Starbucks (NASDAQ: SBUX), which signed a marketing deal in March to become the exclusive purveyor of super-premium coffees available for purchase in K-cup cartridges.

As of last month, the few national brands that hadn’t partnered with Green Mountain included just Maxwell House, owned by Kraft Foods (NYSE: KFT), and Peet’s Coffee (NASDAQ: PEET). A deal with Maxwell House remains unlikely, given Kraft manufactures a rival, the aforementioned single-cup brewer system, called Tassimo.

Key patents set to expire

Green Mountain’s key retail partnerships could unravel next year, when two key patents (such as coffee filter design) for the K-cup expire. For example, Green Mountain’s agreement with Starbuck’s provides exclusivity as the “super-premium” brand for Keurig.

But it still allows the Seattle-based java king to sign distribution single-cup deals with other competitors, such as the Flavia beverage system (manufactured by Mars), Sara Lee‘s (NYSE: SLE) Senseo system, or Nestle‘s Nespresso. Starbuck’s chief executive Howard Schultz has publicly opined in the past that his company would likely look to develop and sell its own single-cup brewer.

Additionally, Stifel Nicolaus analyst Mark S. Astrachan cautioned investment banking client investors  recently that new sales data suggests Green Mountain’s own branded coffees are losing single-serve share to J.M. Smucker’s (NYSE: SJM) Folgers. Astrachan presciently warned, too, that share losses could accelerate in coming quarters as beverage drinkers grow more familiar with K-cup offerings from Dunkin Donuts and Starbucks.

The increasing likelihood of direct competition to its Keurig-brewed technology and the incessant demand for more working capital — combined with an inability to successfully differentiate its own branded specialty coffees — suggest the only green this coffee roaster will see in its future is coffee beans — not profits.

Written exclusively for 24/7 Wall St. by David Phillips. Phillips has more than 25 years’ experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog, the 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, CBS News, The International Herald Tribune, Investor’s Business Daily, Kiplinger’s Personal Finance, and The Wall Street Journal.

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

Adobe Systems Inc. (NASDAQ: ADBE) Reiterated Buy and Raised target to $40 at BofA/ML.
Altera Corp. (NASDAQ: ALTR) Reiterated Buy and $52 target at Gleacher & Co.
Anheuser-Busch InBev (NYSE: BUD) Raised to Buy at Goldman Sachs.
Ciena Corporation (NASDAQ: CIEN) Reiterated Buy and Raised 12-mo. target to $30 at Argus.
Dover Corporation (NYSE: DOV) Started as Neutral with $70 target at Credit Suisse.
Human Genome Sciences, Inc. (NASDAQ: HGSI) Maintained Outperform and Raised target to $34 at Credit Suisse.
Intuitive Surgical, Inc. (NASDAQ: ISRG) Started as Buy at Collins Stewart (late-yesterday call).
NetApp, Inc. (NASDAQ: NTAP) Cut to Neutral at Susquehanna.
Netflix, Inc. (NASDAQ: NFLX) Reiterated Buy and $275 target at BofA/ML.
Peet’s Coffee & Tea Inc. (NASDAQ: PEET) Cut to Sell at Janney.
Polo Ralph Lauren Corp. (NYSE: RL) named as Bull of the Day at Zacks Investment Research.
Semtech Corporation (NASDAQ: SMTC) Reiterated Buy and raised target to $29 at Gleacher & Co.
Suntech Power Holdings Co. Ltd. (NYSE: STP) Cut to Underweight at HSBC.
United Parcel Service, Inc. (NYSE: UPS) Reiterated Buy and $82 target at Bof/ML.
Williams Companies Inc. (NYSE: WMB) Reiterated Buy and raised target to $36 at Argus.

You can join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, dividend trends, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

The rush to buy coffee is likely to get worse as a result of a decision last week by the Intercontinental Exchange Inc. (NYSE: ICE) to kill sales of beans that are too old to brew decent coffee. The Wall Street Journal reports that ICE’s stockpile of certified coffee has fallen 44% since the beginning of 2010.  The effect on prices could be severe, and US coffee sellers could feel the pain. Kraft Foods Inc. (NYSE: KFT), Starbucks Corp. (NASDAQ: SBUX), Farmer Bros. Co. (NASDAQ: FARM), Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR), Peet’s Coffee & Tea Inc. (NASDAQ: PEET), and Caribou Coffee Co. Inc. (NASDAQ: CBOU) could see prices for coffee rise from about $2.20/bag to as much as $4/bag by the middle of 2011.

Last week, the ICE said it would allow Brazilian arabica beans to be delivered starting with 2013 contracts. Brazilian beans have never been allowed before due to quality concerns. Given the short stockpile, though, the ICE decided to allow the Brazilian coffee in an effort to improve liquidity in the market and to bring futures prices down.

The ICE also prevents coffee graders from certifying beans that produce “aged flavors in the cup” and increased penalties for sellers of beans that have been in a warehouse for more than two years. These changes were made in response to claims from buyers that beans from ICE-certified stockpiles “were so old they were unfit for consumption.”

Kraft, Starbucks, and Farmer Bros. have already increased prices on some products.

As older beans leave the stockpile, there are no new beans to replace them. The cash price for beans is now higher than the futures price, which means sellers have no incentive to certify their beans through the ICE. The exchange can’t replace the beans it sells, and the beans used to make the coffee you drink are not certified, meaning that quality could end up all over the place.

The coffee companies will continue to buy certified beans as long as they are available, simply in order to maintain the quality that allows them to charge a premium price for their beverages. But a $4 latte may soon be a thing of the past.

Starbucks was re-instated on Goldman Sachs’s ‘Conviction Buy’ list, and its shares have risen about 1.5% today. Shares of Caribou are off about -2% on the company’s announcement of secondary share offering at $9.75/share, a discount of about 5.5% to yesterday’s closing price. The iPath DJ-UBS Coffee Total Return Subindex ETN (NYSE: JO) is off about -1.5% as well. The ETN is up about 35% over the last six months, however.

Green Mountain, lowered its estimate of first quarter earnings last week and its accounting practices are currently under scrutiny by the SEC. Its shares are off about -1% today.

Paul Ausick