Not Your Average (Cup of) Joe
Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Ok, that title may not be entirely true. Take an average day, a strange day, or anything in between and think about the last time you didn't consume or witness consumption of coffee. I find this task to be impossible. My family, friends, and coworkers down coffee like it is their job. People enjoy coffee as part of their daily routine, as a social drink, or as a relaxing beverage. Coffee is average in this regard, but the industry itself left average behind years ago.
For those who don't observe it, coffee is ubiquitous. Over half of all American adults drink coffee daily. This is made possible and convenient because coffee is available nearly everywhere in endless forms. The 100 million coffee drinkers are only going to increase in number over time, so there is plenty of reason to invest in the industry. Food and beverage companies offer viable options for getting a piece of the pie, but the specialty companies will yield the highest returns from this army of coffee consumers. Consider a few companies who are cashing in on the $18 billion spent on specialty coffee in the US per year.
Green Mountain Coffee Roasters (NASDAQ: GMCR)
Green Mountain has truly had a roller coaster year, trading at almost $70 in February, falling to nearly $17 in July, and now enjoying a year-end run, hitting $40 recently. Its partnership with Starbucks looks durable and beneficial to both companies, shunning the concern that only one would emerge the winner.
Between the home, traveling, and office coffee drinkers, Green Mountain's Keurig machines are wildly popular for their variety, convenience, and quality. I have a friend who takes her machine with her when she travels. Do a quick shopping search for "K-Cups" and you won't even know where to start. The holiday numbers for K-Cup sales are going to be fantastic as usual, and Green Mountain will cash in.
From a technical aspect, things look promising. My favorite statistic, free cash flow, is back in the green. Operating margin is catching up with the juggernauts of the food and beverage industry, and the stock trades at a P/E right around the S&P 500 average. EPS is sure to grow back with hopes of hitting the same levels of a year ago. There are plenty of bears fleeing this company, but the outlook is positive and has the upside in its favor.
Starbucks (NASDAQ: SBUX)
The undisputed king of the coffee industry commands lines at its locations during nearly all operating hours. The old adage is that you can stand anywhere in New York City and spot a Starbucks. Although the $18 billion figure mentioned before is not completely broken down by retailer, it's safe to say Starbucks is getting a nice chunk of this money. The average price of an espresso-based drink is $2.45, compared to regular coffee drinks at $1.38. Considering their median operating margin of 14%, the company is cashing in on the pricey drinks and will likely engage in cost-cutting to better this factor.
Starbucks has a mountain of green (had to be done, my apologies), but is refraining from sitting on it. Recently acquiring Teavanna (NYSE: TEA) and already holding the Tazo brand, Starbucks is making sure coffee isn't the only thing it produces. The company plans to open 3,000 cafes in the next few years, 1,500 of them in the US. This expansion is partially replacement for the nearly 500 stores that were closed from the meltdown of Border's. The growth is reasonable and looks to meet the ridiculous demand for coffee. Starbucks will be subject to the positive and negative swings of the media, but it will continue to grow and be the poster boy of the industry.
Nestle (NASDAQOTH: NSRGY)
Nestle deserves a quick shout-out in this discussion. Being the largest food and beverage company in the world, they have an arm in coffee manufacturing, but an even bigger one in the coffee creamer industry. Being that only an estimated 35% of coffee drinkers prefer their coffee black, people are throwing all types of additions into their concoction.
Nestle's Coffee-Mate brand holds 68% of the retail market share. The creamer industry as a whole generates $3 billion in annual sales, so Nestle is sitting pretty on this number, which is projected to grow 10% by 2017. In addition to coffee/coffee creamer projections, Nestle provides diversification and a blue-chip to any long-term investor's portfolio.
Clean Out for Coffee?
Many investors choose to re-balance and change their portfolio at the end of the year for tax purposes and growth projections. Coffee is a great place to look, providing a worldwide consumer good that looks like a freight train of sales at this point. Will Green Mountain join Starbucks back on top? Will Nestle move in to do a bit of bullying? Take a sip of your drink and give it some thought.
Coffee Statistics taken from Statistic Brain
KyleVaughan has no positions in the stocks mentioned above. The Motley Fool owns shares of Starbucks and Teavana Holdings and has the following options: long DEC 2012 $16.00 puts on Green Mountain Coffee Roasters and short JAN 2013 $47.00 puts on Starbucks. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!