Legendary investor Jim Rogers is extremely bullish about commodities. Recently he repeatedly stated that commodities are going to go up regardless of how economy performs. He is extremely bullish about oil, gold, silver, and agricultural commodities. One of these agricultural commodities is coffee. Arabica coffee futures are at an all time (34-year) high this year. Is this all speculation or is there any real value behind this?
In a CNBC interview, Starbucks' (SBUX) CEO Schultz underlines that they can't identify a problem in the coffee supplies. In 2011 world coffee exports rose by 16% from the previous year. So, why then are coffee prices going up? Schultz blames speculators. Some industry analysts mention weather related issues and increased coffee demand in Brazil.
Some of the major coffee retailers, such as Starbucks, Dunkin' Donuts, and McDonald's (MCD) already increased their prices on coffee. Kraft (KFT) raised its Maxwell House & Yuban brand prices by %20. In the light of this we would like to look at more specifically to some of the companies that are involved in coffee trade:
Starbucks (SBUX): Starbucks lost a big chunk of its market value during the Great Recession but recovered most of it during the past two years. Recently, the company made an attempt to penetrate into the $1.6 billion single-serve coffee market. This market alone represents two thirds of the total growth in the US coffee market over the last year. Starbucks and Green Mountain joint venture is expected to generate around $1 billion in sales annually.
Starbucks' P/E ratio is 27.91. Net profit margin in 2010 was 9.6%, higher than the industry's 9.4% ratio. Starbucks started distributing dividends in 2010 and the yield was 1.4%. In the most recent quarter SBUX reported earnings $0.45 per share, vs. analysts' estimates of $0.39 per share.
Green Mountain Coffee (GMCR): Green Mountain has been growing at a very high rate during the past couple of years. Revenue for the current period was up 67% from $345 Million in FY2010. A successful joint venture is in the works with Starbucks. The new K-Cup deal generated Green Mountain's 91% of consolidated net sales in the first quarter. The Keurig brewing system is now 100% owned by GMCR. Green Mountain is also planning to cut a distribution deal with Dunkin' Donuts. Green Mountain is at an all time high now hovering around $65.
McDonald's (MCD): According to NPD research group specialty coffee servings rose by 3.3 percent and cold and frozen coffee sales jumped 8.5 percent last year due to the launch of the McCafe concept that started in 2009. The new McCafe concept is available around 11,000 locations. McDonald's think that McCafe concept is the reason for revenue growth in six of the past seven quarters.
In the first quarter of 2011 MCD's profits rose %11 compared to a year ago. MCD earned $1.15 a share in the period, up from $1 a share in the same quarter of 2010.
Peet's Coffee & Tea (PEET): Jerry Baldwin who is one of the co-founders of Starbucks and other original Starbucks owners had purchased Peet's Coffee & Tea. To this day they continued to run it after selling Starbucks to Howard Schultz's management. Starbucks-Green Mountain Coffee single cup deal was a major challenge for Peet's Coffee. Peet's Coffee & Tea was seen as the loser in the deal. Peet's stock tumbled 11% after the merger which led to downgrades.
However, Peet's has a very strong current ratio of 3.94. The company has room to grow if they desire to expand in the K-Cup or instant coffee market. Analysts also expect PEET to grow at 17.5% annually over the next five years.
Kraft Foods (KFT): Kraft has distributed Starbucks' bagged coffee along with Starbucks' Seattle's Best coffee brand, in supermarkets and other retailers since 1998. However last year this long time distribution agreement came to a halt. The reason, according to Starbucks, is that Kraft had breached the partnership agreement by not aggressively promoting Starbucks' brands in stores. Kraft was quick to replace Starbucks partnership with Swedish Coffee Brand Gevalia . Gevalia has already presence in the U.S. where it markets its products online. Other Kraft coffee brands include Jacobs, Maxwell House and Tassimo.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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