Starbucks (Nasdaq: SBUX ) has been struggling, and it sure looks like investors are sweeter on Peet's Coffee & Tea (Nasdaq: PEET ) at the moment. The last time I checked Peet's stock, it had surged about 25% today.
Peet's second-quarter net income increased 66.7% to $3 million, or $0.21 per share. Revenue was not quite so steaming hot, having jumped 16.6% to $70.1 million. Peet's was able to improve its operating margins by 240 basis points -- an element to admire these days. In its conference call, Peet's said strong growth in its grocery and food-service channels helped offset softness in retail.
A 25% increase in Peet's share price in one day seems nutty, but I guess investors are even more jubilant since Starbucks can't seem to get itself off the floor. After all, a quarterly profit increase, especially an impressive one, looks pretty darn good given Starbucks' first-ever quarterly loss. Don't forget that Peet's beat estimates in a down economy, too.
Investors' selection of coffee-pouring companies investors don't all offer apples-to-apples comparisons. Green Mountain Coffee Roasters (Nasdaq: GMCR ) -- which yesterday reported an impressive quarter, as noted in my Starbucks article -- doesn't operate cafes at all.
Peet's may be a closer comparison to Starbucks, with both cafes and distribution through grocery stores and food-service providers, but its major market thus far is the West Coast. Not surprisingly, Peet's has just a tiny fraction of the cafes that Starbucks does (as of December 2007, a mere 166), and it may face a major battle with greater expansion, although it's already starting its East Coast onslaught.
Peet's is trading at 37 times trailing earnings, far surpassing Starbucks' 17 P/E. Then again, Peet's looks more appealing than struggling Caribou (Nasdaq: CBOU ) , which has reported a loss over the last 12 months. If Peet's can deliver sufficiently heady growth, it might not be so pricey after all. (Wall Street expects 20% growth over the next five years.)
Many people found Starbucks a pricey stock back in the old days -- back when it always exceeded reasonable expectations by a long shot and proved naysayers wrong. I can't blame some investors for thinking that Peet's could be the second coming of coffee, but caution is in order as this company aims for growth in a slow economy. I think waiting for a more reasonable price may be a prudent step, lest some investors get burned.
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