Contrarian Coffee Player Ripe for Investment
Many of us cannot start off the morning without a cup of coffee. I know I can’t.
Coffee prices are showing some life after nine straight months of contraction, according to data from the International Coffee Organization (ICO). The price of coffee rallied in July 2012 with the ICO composite indicator surging up 9.5% versus June.
My stock analysis is that the fundamentals also look promising on the demand/supply end.
World production is estimated at 131 million bags in 2011 and 2012, which is lower than the 138 million bags predicted to have been consumed in 2011, as shown on the chart.
Source of statistics: International Coffee Organization
Chart © Lombardi Publishing 2012
In the equities market, my stock analysis is that Starbucks Corporation (NASDAQ/SBUX) is the dominant player on the retail side, especially with its aggressive growth strategy in China.
While I do like Starbucks as a long-term play, based on my stock analysis, mid-cap coffee wholesaler Green Mountain Coffee Roasters, Inc. (NASDAQ/GMCR), a producer of higher-end specialty coffees and single-cup brewing systems, has a better risk-to-reward profile.
Green Mountain sells hundreds of varieties of coffee, tea, and other beverages that are used in single-cup brewing machines, including the company’s “Keurig K-Cup Single Cup” brewers. Green Mountain also offers whole bean and ground coffee in bags.
Green Mountain coffees are sold under the Van Houtte, Brûlerie St. Denis, Brûlerie Mont-Royal, and Orient Express brands. The company also licenses coffee from Bigelow and Wolfgang Puck.
Yet this former high-flying stock has been under extreme pressure on concerns of increased competition in the single-cup coffee business and its bagged coffee sales.
Green Mountain traded as high as $115.98 on September 20, 2011, but steadily fell to a 52-week low of $17.11 on July 23 before the subsequent surge above $24.00.
I view Green Mountain as a contrarian play that could return some strong gains if the company can turn around its operations, based on my stock analysis.
Revenues increased in nine straight years from 2002 to 2011. Growth has been steady from $100 million in 2002 to nearly $2.7 billion in 2011, based on my stock analysis.
In 2011, revenues nearly doubled to $2.7 billion from $1.4 billion in 2010. Going forward, revenues are estimated to grow 45.9% to $3.9 billion in 2012 and 24.4% to $4.8 billion in 2013. These are strong growth metrics, according to my stock analysis.
On the earnings side, the company reported annual growth in each year with the exception of 2005 to 2006. Annual earnings surged from $597 million, or $0.06 per diluted share, in 2002 to just under $200 million, or $1.31 per diluted share, in 2011.
The company is set to see its earnings rise to $2.24 per diluted share in 2012 and $2.61 per diluted share in 2013. My stock analysis is that Green Mountain is trading at a reasonable 9.2X its estimated 2013 earnings and an undervalued price/earnings to growth (PEG) ratio of 0.34. In comparison, Starbucks is trading at 21.2X earnings and 1.35 PEG, respectively.
The near-term picture is moderately bullish at August 9, based on my technical analysis. The stock is trading above its 50-day moving average (MA) of $20.89, but below its 100-day MA of $29.81 and 200-day MA of $42.83. My stock analysis is that Green Mountain is showing a bullish bias on strong relative strength.
An upward move could see the stock move to the 13-week high of $26.80 and resistance level of $31.46.
Chart courtesy of www.StockCharts.com
So if you are on the lookout for a contrarian play, Green Mountain Coffee may be your cup of java and one of the next stock market winners, based on my stock analysis.