Coffee Holding Co: Turnaround Time Is Near

Dec. 13, 2019 12:17 PM ETCoffee Holding Co., Inc. (JVA)98 Comments
Mark Krieger profile picture
Mark Krieger
1.73K Followers

Summary

  • Coffee futures have rocketed 40%.
  • Lost Keurig business has been replaced.
  • The addition of CBD infused product is the wild card.

There is absolutely no doubt, Coffee Holding Company Inc (NASDAQ:JVA) has faced a fair bit of adversity, in its last five years. First, it lost 60% of its sales, when its largest customer Green Mountain Keurig, was acquired. Secondly, a deep selloff in coffee futures disrupted and depressed its pricing. Today, things have improved considerably. All the wholesale business that JVA lost from Keurig, has now been replaced by higher branded or private label business. Its mix currently, is about 50% wholesale and 50% processed. Back in the second quarter, the CEO was crystal clear on the importance of coffee pricing stating:

"Like many of my colleagues in the coffee market, we did not anticipate the length and severity of this decline, the most extensive I've been involved with in my thirty five years of coffee industry experience. The playing field has fundamentally changed over the past few years from a supply/demand ballgame to a volatile atmosphere due to the over involvement of outside speculative forces. Obviously, if the market were to rally substantially, both revenues and gross profits would quickly move in the same direction"

The good news is, that's exactly what happened. The price of green coffee beans have already rallied substantially (40% since July), and I expect that every subsequent 10 cent increment rise in coffee prices, to translate into a 3 cent addition, to the bottom line. That's tremendous leverage, to say the least.

It has been six months since my last article, when the stock more than doubled in less than four weeks, on a strong 1st quarter report and the speculation that CBD oil would be used in some of its lines. That enthusiasm quickly evaporated as the year progressed, as the shares gave more than 1/2 of those gains. The good news is, the company is now much stronger and efficient than it was just one year ago.

The question is, when will Wall Street finally figure this out? The risk is, Wall Street may never figure it out. Couple that with the possibility of poor operational execution, and you have a scenario that could offer as much as 30% downside (the stock's previous all time low). I don't expect this to happen, because earnings estimates are based on a "no launch" scenario of CBD and coffee prices at sub $1.00 per lb pricing. In addition, US consumption of coffee has been steadily increasing at a average 4% clip per year, so the threat of intense competition, is somewhat mitigated.

The Maxim Group's (food analyst Stephen Anderson) target price of $9.00, is based on a 2020 earnings prediction of 37 cents and a 2021 earnings estimate of 58 cents (implying a striking 57% growth rate). These EPS projections, are based on forward PE's of just 11.1 and 7.0- Anderson also incorporated a 9.5 times forward EV/EBITDA multiple and forward sales multiple (predicated on a .5X peer multiple) in arriving at his $9.00 one year price target.

The stock has seen some nice improvement over the last six months (about a 20% climb from its 52 week low), ratcheting above its triple top resistance area of $4.15, and getting close to its 200 day moving average line at $4.59.

Although it has delivered progress, the stock is still caught in a time warp of disdain and disinterest. This type of unpopularity, provides ample opportunity for the contrarian investor, the ability to purchase companies when they are out of favor, and then sell them when a very fickle Wall Street, deems them hot. The investor looks to discover "inefficiencies in an efficient market", if you may. After all, how else are you supposed to buy low, and sell high?

Mr. Anderson is looking for fourth quarter results, which generate a 7.20% increase in revenues from $22.94 million to $24.60 million and a whopping earnings jump of 133%, from 3 cents to 7 cents per share. His analysis is derived from continued growth in JVA's higher margined branded coffee business, and strengthening in its customer base. Earnings are due out, the last week of January.

Institutions have been slowly accumulating. During the third quarter, Renaissance Tech LLC remained JVA's largest outside owner with a 6.40% wager. JVA's next largest holder, the Vanguard Group pushed its sum to 5.25%. Ancora Advisors LLC now controls 4.65%, while Neuberger Berman Group enlarged its total to a 3.65% stake, in the pecking order. The CEO and CFO together, control a 12% portion of the company. It has been more than two years that either of them, have purchased shares in the open market (an act that would help instill confidence in the name). A disappointing development, indeed.

The Board of Directors previously agreed to pay out 1/3 of it earnings, in cash dividends, in lieu of the company's $2 million stock re-purchase program. That comes out to a mere 12 cents (or $660,000) to shareholder's, based on 2020 current earnings projections. That is simply not enough to move the needle, and is too little, too late. I have expressed my thoughts with management on this subject. My take? With so few shares outstanding, a stock buyback would provide much more bang, for the buck. It would also not be taxable. In addition, it would increase the company's earnings per share. Lastly, it would instill confidence with Wall Street. Something the stock price, desperately requires.

The wildcard is surely the company's quest to enter into the CBD market. CEO Gordon has labeled this enterprise as a "game changer". When Gordon first announced his intentions, the shares more than doubled on this "out of the box" thinking. Since then, the company has backtracked, claiming they will enter the business, when the regulatory market is more favorable. The good news is the regulatory environment is advancing at lightening speed. Both Illinois and Michigan passed laws to permit recreational cannabis, while the US House voted to decriminalize recreational use. These events could make JVA's adoption of CBD infused oil in some of its brands, sooner rather than later.

The company has had few and far between press releases. In fact, they have been completely void (other than quarterly reports) since last Valentine's Day, when the coffee purveyor announced its new single serve Cafe Caribe line (featured in H-E-B Supermarkets).

Being a rather large shareholder myself, I realize the importance of news events, to move the share price (especially factoring in such a tiny float). I have continually pestered the CEO about when we could expect the next news release, and his last response was, "probably in December". That's good enough for me.

Although some could argue, that this article can be construed as nothing more than a "puff piece". I disagree. My mantra has always been, "under promise, and over deliver". That line of thinking, has no room for setting the bar too high.

My earlier predictions that either Farmer Brothers (FARM) or JAB Holdings would acquire JVA, has obviously not happened. At this juncture, my thinking is, if it hasn't been acquired by now, it probably never will. The Gordon's (the CEO and CFO) have too much power and sentimentalism to allow this to occur. After all, their dad founded the company.

I think this is a good thing, because two years of operating improvement will ultimately yield a much larger return, than an immediate cash buyout. A buyout might produce a share price of $7.00, where a higher earnings company in two years, could construct a share price of $14. I'd rather have $14 in two years than $7 tomorrow. Wouldn't you too?

This forecast isn't based on Fantasy-land antics, either. Just eight years ago, its stock traded as high as $26. The company has the wheels to get back there again, especially with minimal net debt, high shareholder's equity and a product (coffee is a addicting drug) that keeps growing in demand.

This article was written by

Mark Krieger profile picture
1.73K Followers
I am a value/activist investor dedicated to the following ideals: (1) Focus on high relative strength, (2) Buy low, sell high aka "buy the dip, sell the rip" (3) Short high, cover low, (4) Go against the crowd, (5) It's all about the rules and discipline- hold them dear (6) Analyze the balance sheet-seek low debt,high cash and hidden value scenarios (7) Cut your losses short, let your gains run, (7) Don’t get emotional, (8) Follow the insiders- buy if they are buying, sell if they are selling (9) Be greedy when others are fearful and fearful when others are greedy.(10) Don't argue with the market unless you detect an inefficiency present-it is smarter than you are. In summary, some of these ideas might be construed as rather trite and overused, but consistent use of them pays off in the long run. Mr. Krieger specializes in the food sector and is the originator of the "Basic Food Fund" index and the "Dirt Cheap Value Portfolio".Why the food sector? "everybody has to eat'! He graduated from the University of Southern California with a BS in Business Administration with an emphasis in Corporate Finance. Mark resides in Cowan Heights, California with his wife, son and pug and is interested in mountain biking, gardening and reading.

Disclosure: I am/we are long JVA. 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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