Should We Follow Mario Gabelli into Caribou Coffee?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Caribou Coffee (NASDAQ: CBOU) has recently announced that it would be acquired for $340 million in cash by the Joh. A. Benckiser Group. Right after that, investment manager Mario Gabelli initiated a long position in Caribou Coffee. Recently, he also increased his holdings by more than 80% to own more than 725,000 shares, accounting for around 3.57% of the company. Why does Mario Gabelli like Caribou Coffee? Let’s see whether we should follow him into this investment or not.

Business Snapshot

Caribou Coffee is one of the leaders in branded coffee with more than 580 coffeehouses in the US. The Company is operating in three main business segments: Retail, Commercial and Franchise. The retail segment was operated with 412 company-operated stores in 16 states in the US. The Commercial was to sell high-quality whole bean and ground coffee to merchandisers, club stores, hotels, etc. The Franchise segment comprised 169 franchised coffeehouses globally, including 74 coffeehouses in the US. The majority of revenue has been generated from the Retail segment of nearly $242.3 million, accounting for 74.2% of the total revenue in 2011. This segment contributed nearly $19.5 million into Caribou Coffee’s operating income. Commercial segment ranked the second, with nearly $13.89 million, whereas Franchise generated only $4 million in the operating income.

Steady Revenue Growth but Fluctuating Bottom Line

In the last 10 years, Caribou Coffee has steadily increased its revenue, from $108 million in 2002 to $327 million in 2012, an annualized growth of 11.7%. However, the operating income has been quite fluctuating, in the range of -$30 million to $15 million. It was mainly due to the fluctuation in the cost of goods sold. For Caribou Coffee, the business’ main raw material is coffee beans. The second largest raw material is dairy-related products, which are purchased from regional dairy suppliers. Along with the fluctuation in operating income, the operating cash flow has also been quite fluctuating, in the range of $7 million - $29 million in the last 5 years. In the recent presentation of the company, Caribou Coffee expected to have around 25% long-term EPS growth. The long-term EPS growth would be leveraged on 8%-10% unit growth, 2%-4% same-store sales growth and 15%-20% commercial business growth. The company has enjoyed the continuous increase in its comparable coffeehouse sales growth of 4.5% in 2010 and 4.7% in 2011. In the third quarter 2012, it also reported a 3.5% increase in the comparable coffeehouse sales growth.

Not a Cheap Price Compared to Peers

On Dec. 17, Caribou Coffee entered into an M&A agreement to be acquired for around $16 per share in cash, with the total transaction value of $340 million. After the transaction, the company will keep operating as an independent company with its own management and growth strategy. Joh. A. Benckiser chairman Bart Becht commented: “Caribou has a fantastic brand and unique culture, and fits perfectly with JAB’s investment philosophy of investing in premium and unique brands in attractive growth categories like coffee.  At $340 million, the deal values Caribou Coffee at around 1.03x sales and 11.35x EV/EBITDA. The deal valuation is much cheaper than the current market valuation of Starbucks (NASDAQ: SBUX), at 3.04x sales and 16.38x EV/EBITDA. However, it is much higher than the valuation of Einstein Noah Restaurant (NASDAQ: BAGL), at 0.49x sales and 5.38x EV/EBITDA. A 17% gross margin of Caribou Coffee was much lower than that of Einstein Noah’s of 24% and Starbucks’ of 47%. The operating margin was also lower. Caribou Coffee’s operating margin was only 4%, whereas the operating margins of Einstein Noah and Starbucks were 7% and 16%, respectively.

Foolish Takeaway

Mario Gabelli thought that Caribou Coffee was “statistically undervalued even at $16.” He mentioned that the company’s EBITDA would increase around 15% to $35 million in 2013. Thus, the $340 million price tag would value Caribou Coffee at 9.7x 2013 EV/EBITDA. However, compared to the other two peers, Caribou Coffee doesn’t seem to be a compelling investment at the current price for an average investor.

 


hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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