After the Peet's Sale, What Next for Caribou Coffee?
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When I checked CAPS today, I noticed that Peet's Coffee and Tea (NASDAQ: PEET) shares rallied sharply. Although the spike could mean that Peet's had some unnoticed potential, the reason for the rally, a buyout by Joh. A. Benckiser, basically takes this stock out of the market. The acquisition could mean that buyers are interested in small cap coffee chains right now, although more reasons are necessary to recommend a stock. This deal did get me thinking about the Caribou Coffee (NASDAQ: CBOU) chain, which shares a few characteristics with Peet's.
Peet's and Caribou Coffee are both strong regional brands, as Peet's has a strong base in the Bay Area and Caribou Coffee has a base in the Twin Cities area. Neither chain has the national or international reach of the top dog in this sector, Starbucks (NASDAQ: SBUX), although these chains' limited geographic presences could attract investors who believe that these coffee shops have more room to grow. Although Starbucks has grabbed many prime locations, Peet's and Caribou Coffee seem like they can still pick up some good spots. There's a Caribou Coffee in the Minneapolis Airport, a popular and high traffic location that Starbucks often grabs at other airports.
One problem with buying Peet's was the valuation argument, as it was very expensive for a coffee shop chain. After the acquisition announcement, Peet's looks even pricier, with a forward P/E of 31.90. Peet's valuation is even higher than Starbucks, which trades at a forward P/E of 22.19. Joh. A. Benckiser's decision could still make sense, as the German conglomerate might be able to develop the Peet's brand further with its own resources, even if Peet's cost too much for regular investors as a standalone company. Even at this buyout price, some Peet's shareholders may still be unhappy, as Robbins Umeda investigates whether another acquirer might have paid more than Joh. A. Benckiser.
Caribou Coffee has sold off in recent months, falling from around $18 to below $12 a share, which removed much of its own premium. This selloff occurred around the same time frame that Green Mountain (NASDAQ: GMCR) crashed, as Caribou Coffee had a K-Cup deal with Green Mountain, which was one of the main reasons that investors liked Caribou Coffee. Now that Green Mountain's stock price has crashed severely, some bargain hunters wonder whether Green Mountain could be a buy now. Green Mountain now trades at a major discount to the market, with a forward P/E of 5.73, and investors are heavily short the Keurig maker, with a short float of 23.70 percent, according to Yahoo Finance.
Caribou Coffee isn't as cheap as Green Mountain is right now, as Caribou Coffee still has an 18.82 forward P/E at $11.67 a share. This premium does look like it could make sense because of Caribou Coffee's 0.95 PEG ratio, because Caribou Coffee still plans to add stores outside of the Midwest and place its coffee on more supermarket shelves. Nevertheless, many investors also believe it's game over for Caribou as well, which has a short float of 18.20 percent currently.
Another drawback for Caribou is its low margins in comparison with Starbucks, as Caribou currently has a 3.7 percent profit margin, much weaker than Starbucks' 10.56 percent figure. Although Caribou does have no debt, Starbucks could pay off its current debt with the cash it has right now. Starbucks, as a much larger company, could also afford to buy both Peet's and Caribou Coffee outright with its $2.23 billion cash balance.
Although I like finding small cap growth stocks with high potential, Caribou looks like it received its current 2 star CAPS rating for a reason. Even though Caribou has room to grow, it needs to get a lot closer to Starbucks' margins before it becomes a buy. Caribou could be an acquisition target, but there seems like no obvious buyer at this point, as Starbucks could just build more of its own shops in the Midwest and leverage its own brand. I wouldn't sell Caribou Coffee right now because of the 0.95 PEG, but I could see this stock going sideways for a while.
enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of Starbucks and has the following options: long DEC 2012 $16.00 puts on Green Mountain Coffee Roasters and short DEC 2012 $21.00 calls on Green Mountain Coffee Roasters. Motley Fool newsletter services recommend Green Mountain Coffee Roasters and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.