Brewing Stocks in the Coffee Industry
Kathleen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Thanks to the decline in sugar and coffee prices, the coffee business is still brewing despite the recession. With a drop in the prices of coffee beans came a boost to the industry's profit margin. As per the United Nations, America imported about 1.5 billion kilograms of coffee in 2011. As of 2012, Coffee prices are already down by 25%. Whereas the per pound costs touched $3 in May 2011, it came down to $1.70 in 2012. This leaves more cash with the companies and higher earnings for the share holders. This trend is expected to continue.
Just as choosing the right flavor of coffee is important while picking your cup, it is important to invest in the right coffee company. The reduction in the price of beans has served as an impetus to the profit margins of the coffee business. Investors will do well to keep an eye on three of the top brewing coffee companies - Starbucks (NASDAQ: SBUX), Caribou Coffee (NASDAQ: CBOU) and Coffee Holding Co. Inc (NASDAQ: JVA).
Sipping With Starbucks
Starbucks is well known in the world of coffee. The world-renowned coffee house is famed for having created one of the most recognizable high quality coffee brands. This company's success is largely credited to the coffeehouses that are rated as 3rd place for informal meeting places.
At an average the company has added two stores a day since the year 1987. As per estimates the company uses 2.3 billion cups in one year and operates in 55 countries at 17,420 locations throughout the world. The use of crushed insects for coloring its products has tarnished the image of the company in recent years. Although it has a lot of potential for growth, a blind eye cannot be turned to the fact that Starbucks faces potential cannibalization risks due to the economic slowdown.
As the recovery for the global economy is underway, the company has revealed plans to open one store daily. Starbucks is closing down underperforming domestic stores and is replacing them with their international stores. China is their new target market. This plan is expected to produce significant growth within two years of implementation. While an investment in the coffee giant is not without risk, the globally diversified operations offer an excellent opportunity for future investment.
A Cup of Caribou
Starbucks seems to get all of the media attention, but Caribou Coffee holds its own. It is the second largest when it comes to coffee companies in the U.S. It has opened its 100th operating location internationally. It operates through 596 retail locations out of which 188 are franchised coffee shops. Outside the U.S. the company has adopted a franchise pattern and has primarily concentrated in the Midwest region. The company gets its revenue from three main areas of business – sales at company owned coffee shops, franchise royalties and commercial sales of packaged coffee products. The retail coffee shop segment contributed 74.2% of the aggregate sales; the commercial sales segment 21.9% and franchise royalties 12.7 million towards the company’s revenue in the year 2011. Since the year 2009, the company’s revenues from the retail segment have increased by a mere 3.27%.
The operating income for the period of 2010 to 2012 has increased. This can be attributed to lower depreciation which is further due to low expansion in its retail segment. Depreciation expenses will increase as the company proceeds to open new coffee shops. This will reduce the profit margins of the company. One competitive advantage for Caribou has been the increase in the comparable store sales (4.7% in 2011; 4.5% in 2010). The management has indicated that it is aiming at a growth of 2% to 4% in comparable store sales.
Other favorable Caribou attributes are its presence in the U.S., a high potential in terms of per retail store revenue and the likelihood that the company may be subjected to acquisition. Though currently the shares of the company are overpriced, it can be considered as an average investment opportunity.
A Sip From a Gourmet Brand
With their announcement of health wise gourmet coffee, Coffee Holding Co. is expected to increase their market share. The company has invested $100,000 for a 20% aggregate interest in this health-wise gourmet coffee.
Coffee Holding is involved in all aspects related to the business of coffee right from manufacturing to distributing blended coffee. The company has primarily focused on two regions – the United States and Canada – for its business operations. It has its presence in three segments of the business: wholesale green coffee, branded coffee, and private label coffee. The company imports more than 90 varieties from around the globe, and supplies 39 different brands in different sizes to wholesalers and retailers.
Coffee Holding experienced losses in the year 2008, but these losses were due to the global recession and the bottom line bounced back in 2009. The company has announced investments in HealthWISE Gourmet Coffees, (LLC) a company specializing in TechnoRoasting process. Profits have reached a level where they can be termed as average, and the liquidity positions of the company are very strong. Although an investment in Coffee Holding could prove to be very promising, cautious investors may feel that the risk is too high.
Some of the major players in the coffee industry are steadily recovering from the recession. With the prices of coffee and sugar being reduced, the market is sure to experience a response from investors, as this is a potential for growth and good profits. If you’ve been eyeing a steaming cup of your own, be cautious, but take advantage while the stocks are brewing.
mimosacreations has no positions in the stocks mentioned above. The Motley Fool owns shares of Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend 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.