We recently wrote about dividend stocks and growth stocks in the restaurant industry here and here. Over the morning cup (or three) of coffee, we realized another food sector we overlooked that might make an interesting analysis: coffee-related businesses.
We decided to look into six coffee-related companies to see if there are any enticing opportunities for long-term investment. We analyzed the fundamentals and intrinsic value of Caribou Coffee Company, Inc. (CBOU), Farmer Brothers Co. (FARM), Green Mountain Coffee Roasters, Inc. (GMCR), Coffee Holding Company, Inc. (JVA), Peet's Coffee and Tea, Inc (PEET) and of course Starbucks Corporation (SBUX).
Using analysts' projected 5-year growth rates (where available, and our estimates otherwise) we came up with the following intrinsic value calculations of these stocks (click to enlarge images):
For reference, the last 5 years' FCF/share annual growth rates are the following: CBOU: -19%, FARM: 20%, GMCR: 34%, JVA: -25%, PEET: 11%, SBUX: 7%.
JVA is the stock that priced at a biggest discount to intrinsic value, using our estimated growth rate of 8%/year. Looking at historic EPS, it is interesting to note only SBUX, GMCR and PEET have had consistent positive earnings over the last 5 years, and only SBUX has also had consistently positive FCF/share over the same period.
The analysis of the stocks' valuation ratios gives us the following:
On a PEG basis, all stocks are sitting well above 1.0. CBOU, JVA, and FARM individually look attractive depending on which of the other ratios you compare against (EV/EBITDA, Price/Sales).
The return on investment analysis gives us the following:
SBUX and JVA currently have ROICs above our target of 15% and seem to be recovering after the dips in 2008 and 2009.
PEET and CBOU, while they are below our target of 15%, are showing steady improvement, which could take them beyond 15% ROIC if the trend continues.
The ROIC of FARM and GMCR is below our target 15% and has declined over the last 8 years fairly consistently.
The debt and liquidity analysis gives us the following:
Only PEET and CBOU do not seem to have relied on debt much to finance their businesses. We look for companies that keep their debt/equity below 50%, and that is where currently all but GMCR currently are. SBUX has taken on significant debt in the past 5 years, but has done a good job of paying it off. While the current ratios of all companies indicate little concern for covering their current liabilities, the quick ratios of GMCR and CBOU (less than 1) and the declining trend in FARM's current and quick ratios bear monitoring longer term.
We've looked at a lot of different fundamentals in these coffee stocks. How do we sort through this to decide which stocks would make the most attractive investments? We will evaluate the above stocks based on four of fundamentals that we have discussed.
The value stock of this group seems to be JVA. However, it only passed 2 of the 4 evaluation criteria we looked at, coming up short on growth rate and discount to intrinsic value. PEET and SBUX seem to be at the head of this pack, passing 3 of 4 criteria. Being priced at roughly intrinsic value, their higher projected growth rates and returns on investment, combined with low debt levels make them the most attractive investment we looked at.
There are other factors that go in to selecting stocks for long-term investment, of course, but based on these fundamentals only, we would consider either of these stocks if their share price pulled back enough to give them a margin of safety greater than 10%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.