After Coffee Holding Company (JVA) posted its quarterly results, on Friday, the stock blew up and the Yahoo! Message Board hasn't been quite the same since. During the six months prior, JVA had traded lower by nearly 60%, but on Friday after announcing earnings the stock jumped a massive 35%. A gain such as this should be enough to satisfy investors, but this particular group of investors is hard to please. Because after all, JVA is a stock that was trading as high as $30 back in July 2011, not to mention, it maintained a level above $15 for 30% of last year. Therefore, investors have particularly high expectations when it comes to JVA, regardless if expectations are too high.
On Friday, JVA blindsided the investment community with its incredible earnings report, after posting previous reports to insinuate operational troubles. The company posted revenue growth of 120% year-over-year with $56.5 million in sales. The company added a 50% increase in net income and an EPS of $0.25 compared to $0.19 in 2010. The strong earnings were driven by an increase in coffee prices (which did not affect demand) and an increase in sales of green coffee. The company also experienced an increase in private & branded label sales; and added its popular Cafe Caribe to four additional supermarket chains, since the start of 2012, which could be huge.
As a result of such strong earnings the stock posted a massive gain, and investors are already setting limit orders for $30. Back on June 6, 2011 the stock was priced at just $7 but after a very strong quarterly report and a major increase in momentum the stock jumped over 300% in just one month's time. The setting is very similar for shares of JVA, which were priced at $7.83, to close on Thursday. The stock had been trading with pessimism, but with another quarter of strong earnings, and profitability, investors feel as though it could spark another round of momentum, and a price of $30.
Despite the striking similarities between now and June 2011 there are still several issues within the company. The company continues to post a decline in margins, due to higher costs. During its recent quarter, operating costs increased 8.5% despite a decrease in officer salaries. The company's CEO Andrew Gordon mentioned this problem and said, "higher increases in sales of green coffee as compared to increases in private label and branded sales have impacted our overall gross margins." He then added "we will always take growth as long as it is profitable." I agree with Gordon and believe that as long as the company is profitable its margins aren't necessarily affecting the company. However, it's a problem that investors must watch, and with margins that are much lower than last year some investors may not be so willing to jump on the JVA band wagon, making it more difficult to reach the $30 milestone.
In addition to a decline in margins the momentum that was once present in coffee stocks has declined. Unfortunately, JVA doesn't trade on a similar trend as Starbucks (SBUX), but it does trade very similar to Green Mountain Coffee Roasters (GMCR). During the first half of 2011, both GMCR and JVA were momentum stocks, and I believe the success of GMCR paved the way for JVA to trade higher. But when GMCR fell off its ledge, as did JVA, and neither stock has been able to successfully recover.
In the past, JVA has traded somewhat close to GMCR, therefore Friday was encouraging to investors. Starbucks had announced that it would be pushing itself into the single serve coffee market, which could directly impact GMCR's Keurig. As a result, GMCR lost nearly 16% of its value on Friday, as fear that Starbucks would take market share and no longer provide single serve K-Cups. Obviously, it was a bad day for GMCR investors, but the negative movement did not affect JVA, which is a sign of encouragement.
Overall, the company posted a great quarter with major increases in sales and income. However, there are still issues with margins and the momentum within the coffee industry has somewhat diminished, besides Starbucks. As an investor, be happy with $10.60, and don't necessarily be counting on $30. I am not saying its impossible, JVA could easily build up enough momentum to become a $40 stock, but its crash would be very hard.
One positive note regarding JVA is that it does have a large number of investors who believe in the company. I myself was long JVA, before selling the stock after declining margins and fear of net loss led me to take a loss. Therefore, I was overwhelmed with excitement when the company posted such strong earnings, as were other investors evident by its 1,700% increase in volume.
I think the majority of Friday's rally was a result of investors such as myself. I have always kept JVA on my "watchlist" and I pay attention to any developments that may create new optimism within its shares.
On Friday, after earnings were announced, I purchased just 275 shares for a price of $9.21 at 9:09 ET (according to my broker). I wasn't willing to enter a large position, but still felt as though it was presenting a good opportunity with such a strong report. I believe there are a large number of JVA investors such as myself, who are slowly entering the water rather than diving off the board. It will be interesting to see how JVA plays out over the next few weeks. If the stock can overcome GMCR's troubles, and any investor pessimism regarding margins, then it could be very special. But as an investor, I am happy with $10.60, and will take it day-by-day, if the stock trades to $30 then I will be ecstatic, but for longs, it may be better if the stock is slow and steady.
Additional disclosure: The information in this article is for informational purposes only. Never act on any recommendation or the investment decisions of the author without due dilligence. You should consult your financial advisor before making any investment decisions.