Youngevity (OTCQX:YGYI) announced last week that its vertically integrated coffee unit, CLR Roasters has inked a new contract for 16 million pounds of coffee. This latest deal comes on the heels of a 2.5 million pound order that was announced just two weeks ago. At current coffee prices, there are commitments for over $20 million in revenue on the green coffee beans alone.
Investors that have followed the space will quickly grasp that at 1.5 months into 2016, CLR Roasters is already on track to top all of its revenue in 2015. What is impressive here is that commitments of over $20 million in revenue from green coffee does not even include the retail channel, the direct selling channel, and third party packaging revenue and distribution. Simply stated, CLR Roasters is fast becoming a very important contributor to the overall bottom line of Youngevity.
My investment thesis in Youngevity is quite simple. The direct selling side of this business provided an opportunity to finance the birth of a fully integrated and vertical coffee business. Market conditions over the past 18 months have been such that buying into the plantations and expanding were all able to happen with the commodity of coffee at long term lows. The concept of "buy-low / sell-high" has been played to its maximum benefit with CLR Roasters and Youngevity.
What I have seen in CLR Roasters was a massive expansion when prices were at their lowest points. This positions the company to capitalize on the commodity prices when they recover. The laws of supply and demand have essentially been ignored in the coffee sector for several months now. Supply is lowering while demand is increasing. At some point the price of coffee will rise to more normal levels, and CLR is well positioned to take care of it.
In my opinion having 18.5 million pounds of coffee committed this early in the year gives CLR Roasters the ability to consider its options from a position of strength. Whether that means investing into more plantations, investing into more plants, investing into more drying and storage, or expanding the direct selling and retail markets matter little. What matters is that there is a level of predictable revenue that will be coming into the company that can be put to work sooner rather than later.
The current price of coffee remains at a very low $1.12 per pound. This pricing is about as low as the coffee numbers can go, as it begins to approach the cost to produce. If plantations can not make money, they simply do not plant. The dynamics in this business are such that the prices cycle. In my opinion we are approaching the end of prices at the bottom and we will see a sharp appreciation of coffee prices in the next several months.
I like Youngevity because of its coffee business. In my opinion it will become a growing contributor to the revenue story at Youngevity. It accounted for between 10% and 15% of the story in 2015, and could grow to 25% of the story or more in 2016. CLR Roasters is demonstrating early in 2016 that the coffee side of the Youngevity business is not only on solid footing, but expanding smartly. I like the coffee segment and like to opportunity presented in this stock with prices so low. Finding undervalued coffee plays is not an easy task. Finding undervalued coffee plays that are big enough to play in the major leagues is even more difficult. With CLR Roasters, allof the potential is there. Stay Tuned!
Disclosure: I am/we are long YGYI.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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