Robert D.'s  Instablog

Being from the Northeast (top market for coffee producers), I do enjoy one or two cups of coffee a day. I am not the kind of person that puts much thought into the coffee I'm drinking, but suddenly I have been flooded with choices. Major stores now have full isles of coffee selections. A new trend of instant coffee is underway, and while some people may have seen this in their offices (Flavia has cornered this market), not many have switched to the coffee-pods at home. Until recently that is, as Green Mountain Coffee (once just a penny stock on the OTC), has now over taken major stores with their kpod machine and pods, targeting at-home customers. These pods, costing around $0.50 each, have now become an incredible hit. Allowing the consumer to store in their homes, 20 different kinds of coffee and teas in pods, so that each individual person can have their own personal cup of coffee, is now becoming the norm.

These pods generate an 8oz cup (soon 12oz pods coming), and come in a wide variety of flavors and strengths. The company has been generating an average sales growth rate of 56% over the past 12 quarters. During their most recent quarter release, GMCR posted a 97% net sales increase on their Keurig (k-pods) business, as well as a 39% increase on their Specialty Coffee business.

From their earnings call:

"The primary driver of the increase in net sales is the continued growth in K-Cup sales which were up over 79% on a  consolidated basis. Sales related to the Tully's brand represented approximately 5.5% of the 61% increase in  consolidated net sales and are included in the Specialty Coffee business unit results for the first time.

Excluding the Kraft litigation settlement, we now expect fully diluted non-GAAP EPS in the range of $1.10 to $1.14  per share, up from prior estimates of $0.98 to $1.02 per share."

Their optimism has without a doubt made shareholders very happy, giving them incredible returns over the past few years. They continue to raise their expected EPS, and have also given very optimistic targets for 2010:

"Our outlook for fiscal 2010 anticipates a net sales growth rate of 45% to 50%, shipments of system wide K-Cup  portion packs to increase in the range of 65% to 70% and fully diluted GAAP EPS to be in the range of $1.70 to $1.80  per share."
 

The company sells its products over major outlets, such as Bed Bath and Beyond, Kohl's, Target, and now Wal Mart. Coffee drinkers have become intrigued by this new technology (convenience of disposable packets), and variety (many flavors), that this is actually pushing consumers to invest in these $99 coffee machines that use these $0.50 pods.

Now let's look at a comparison of current key valuations between three major (public) coffee players, Starbucks, Green Mountain and Diedrich.



Investors are clearly building a large short position on GMCR. Their explosive growth has pushed the stock price beyond reasonable valuations pushing their PE multiple to extremes, and is now trading at 14 times book value. Starbucks has generally received a premium on their shares, being an innovator in its business, and being one of the most successful coffee shops of this decade. GMCR may be sporting this same premium at the moment.

I am very confident that GMCR will continue on its path of growth, however I am very hesitant to invest in a company which bolsters their high EPS targets after 12 quarters of incredible growth. Any earnings miss, could cause this stock to follow in the footsteps of companies like CROX or HANS.

As call option activity continues to rise at the $80 level for October, it seems people continue to expect this stock to push higher. Their next two quarters may be their best ones yet, and shares may continue to rise, however I will sit back with a cup of coffee and wait for the shares to come down to more reasonable valuations, or begin to slowly build an OTM put-option position for the long-term. Expect high volatility coming near or on earnings.

Disclosure: I do not hold any stocks mentioned at the time this article was written.

While the United States has adopted an anti-coal policy due to its polluting nature, China has not held back in expanding its coal power dependence. Even though China would like to have 15% of its energy source be from renewable energy, in order to do so, it must protect itself against the shortcomings of renewable energy.

As reported by several sources, China coal imports keep rising. According to Wang Xianzheng, chairman of the China National Coal Association, China’s coal output and sales respectively gained 8.9 percent and 2.23 percent year on year in the January to July period. In addition, China’s domestic coal inventory is likely to fall in the next three to four months due to growing coal demand and tight supply

Even though coal is not normally exported from US to China (Australia is much closer), times are changing. Companies are looking to find ways to capitalize on China's growth (and the rest of Asia), by exporting raw materials to developing countries.

During a recent conference call to discuss financial results Teck CEO Don Lindsay told analysts, "There's no question [coal] demand has picked up strongly. The issue is actually being able to fill that demand."

"We have not been able to meet the full demand at this stage," he said, adding that Teck is "not doing spot sales until we can produce more coal."

Lindsay noted that plans to build "very large steel mills" on the China coast "will have a very significant effect on seaborne met coal."
Source: Miniweb

Consol Energy has also exported coal to China. United States companies are beginning to see this as a new market opportunity.

When looking at stock prices in the coal sector, we can see there has been tremendous price appreciation in the past 6 months, when the market bottomed. The Market Vectors Coal ETF (KOL) clearly shows significant gains.




Likewise, shares of individual companies have quickly surged since hitting their lows. Nonetheless, due to expected economic rebound, an increase in metal demand, and over-all growth of emerging markets, we can expect continued growth in a resource that remains cost-effective.



One company in particular stands out, Patriot Coal, with a P/E of 4.50, the lowest in its industry. We have seen what the stock of companies like TCK can do when pessimism turns into optimism.



There are additional ways to jump into the coal wagon, which can pertain to investors depending on their risk appetite. For example, investors may choose to invest in high dividend payers like Alliance Resource Partners (ARLP), Natural Resource Partners (NRP), and Penn Virginia Resource Partners (PVR), yielding 8.2%, 10.5%, and 10.75% respectively. Additionally, there are companies listed in the OTC and Pinksheets which may include Chinese companies listed in the US, as well as smaller companies. Companies like Puda Coal were recently uplisted from the OTC and saw a quick price surge.

Whatever your risk appetite may be, coal should be part of your energy portfolio, as our global coal dependence is far from over.

Disclosure: Long PCX (as of 4/1/09)