Why I'm Not Shorting Diedrich Coffee

From a purely technical perspective, there are a lot of reasons why Diedrich Coffee (DDRX) might be tempting to short. Shares are up over a hundred-fold from their 52-week lows of $0.21. Resistance in the 25-26 area looks like it may hold, and momentum is fading.

But when you look beyond the numbers, the trade looks a little dicier. 90% of Diedrich’s revenues come from "k-cups," those little single-serving beverage products developed and licensed by Green Mountain Coffee Roasters (GMCR). Diedrich expects $90-$95 million in revenue for the fiscal year ending June 30, 2010, about a 45-50% increase year-over-year. K-cup sales will undoubtedly be the driver.

K-cup demand growth depends upon the growth of k-cup coffee machines. Each coffee machine creates an annuity of demand for the consumables sold by companies like Diedrich. At least in terms of retail k-cup machines, those sales appear to be highly seasonal. If the google trends chart is any indication, I expect another big holiday season for k-cup machines:

And all of those machines need a k-cup to produce every cup of coffee. That’s where Diedrich comes in. On Amazon.com, for example, Diedrich’s Coffee People and Gloria Jean’s brands account for 6 of the top 10 bestselling grocery items returned for the search "k-cups":

1. Coffee People, Donut Shop K-Cups for Keurig Brewers (Pack of 50) [Amazon Frustration-Free Packaging]

2. Gloria Jean’s K-Cup, Pumpkin Spice, 24-Count Box

5. Coffee People K-Cup Donut Shop Coffee for Keurig Brewers, Medium Roast, Extra Bold, 24-Count Boxes (Pack of 2)

6. Gloria Jean’s Coffees, K-Cup, Flavored Coffee Variety for Keurig Brewers, 22-Count Boxes (Pack of 2)

9. Gloria Jean’s Hazelnut K-Cups for Keurig Brewers (Pack of 50) [Amazon Frustration-Free Packaging]

10. Coffee People Jet Fuel K-Cups for Keurig Brewers (Pack of 50) [Amazon Frustration-Free Packaging]

Bottom line: while the technical momentum for Diedrich Coffee may have slowed, I’m not interested in shorting DDRX ahead of what could be a very big sales push for k-cup makers and consumables.

DISCLOSURE: no position.

Comments

[DavidYou:]

K cups are expensive and produce a lot of garbage. A lot of companies are replacing them with pods or the traditional method.

Oct 18 12:33 PM

[BRONXMIKE:]

We are in the infancy of the k-cup success story.
Sure, at some point a competitor will develop a better system. However, it will not be easy as Kraftco found out when they settled fro $17million in a patent infringement suit.
Ride DDRX and GMCR. Sales of brewers will soar this holiday season , especially since it is the first one with WALMART as a retailer.

Oct 19 12:31 PM

[Robert D.:]

The extreme price valuations of these two stocks are as a result of expected blowout earnings for the next two quarters. Can you possibly imagine what may happen to your shares the day these companies don't meet their own revenue expectations? I'd rather take a volatility options spread on the earnings call. We should definitely see some movement, one way or the other.

Oct 19 01:33 PM

[James Davis:]

Shows ya, a sucker is born every 30 seconds. These folks are overpaying something awful for mediocre coffee, just so they dont have to touch a few grounds.

Barnum was right.

Oct 19 01:53 PM

[bobbobwhite:]

Know a woman who spends $1k a year in Starbucks. In a 40 year work span, that's $40k bucks that could have been invested. I probably spent no more than $1k total in the last 40 years on coffee.

Spending like she does on Starbucks-type coffee is the new paradigm for of having too much money. Used to be cocaine, but is coffee really any different? Just words.

Oct 19 03:33 PM

[bobbobwhite:]

Know a woman who spends $1k a year in Starbucks. In a 40 year work span, that's $40k bucks that could have been invested. I probably spent no more than $1k total in the last 40 years on coffee.

Spending like she does on Starbucks-type coffee is the new paradigm for of having too much money. Used to be cocaine, but is coffee really any different? Just the words.

Oct 19 03:33 PM

[bobbobwhite:]

Know a woman who spends $1k a year in Starbucks. In a 40 year work span, that's $40k bucks that could have been invested. I probably spent no more than $1k total in the last 40 years on coffee.

Spending like she does on Starbucks-type coffee is the new paradigm for having too much money. Used to be cocaine, but is coffee really any different? Just the words.

Oct 19 03:34 PM