Peet's Serves a Tepid Cup

Many caffeinated coffee stocks have had a hard time lately, and third-quarter results from Peet's Coffee & Tea (Nasdaq: PEET  ) didn't give investors much reason to pour themselves a generous cup of the company's shares.

Granted, net income did increase by 9.9% to $2 million, or $0.15 per share. Net revenue increased 12.5% to $68.5 million. Peet's reaffirmed its guidance for this year, calling for $0.77 per share to $0.82 per share in earnings, and said that in 2009, earnings will increase 20% to 25%. In the current climate, these aren't exactly terrible tidings.

Still, this quarter is a far cry from Peet's second-quarter results, when it reported a 66.7% increase in net income; the stock surged on those results. Of course, let's face another fact: Peet's is arguably a premium-priced stock compared to rivals and to many stocks overall, trading at 28 times its trailing earnings. When you can purchase stock of high-quality companies like Apple (Nasdaq: AAPL  ) or Netflix (Nasdaq: NFLX  ) for far cheaper multiples (price-to-earnings ratios of 20 and 18, respectively), why choose a stock like Peet's, particularly since it faces plenty of competition along with a slow consumer environment?

Rival Starbucks (Nasdaq: SBUX  ) may have recently reported its first-ever quarterly loss, but it's fallen to bargain territory, trading at just 17 times earnings, far lower than its historical P/E and that of Peet's and other rivals. Green Mountain Coffee Roasters (Nasdaq: GMCR  ) , while successful, is perhaps super-premium in the space, given its P/E of 37 (even with the stock's recent drop). And of course, coffee laggard Caribou (Nasdaq: CBOU  ) has been struggling to be profitable at all, so I continue to believe investors shouldn't even think about that one; it's no time for dicey turnaround plays.

Last but not least, competition should intensify for the fewer dollars consumers are willing to spend. As much as many folks are very down on Starbucks, I think it's a major mistake to underestimate its chances at a comeback.

Last quarter, I admitted Peet's has got some nice attributes, such as ample room for growth; and of course, that quarter was impressive. However, I also cautioned that it would probably be better for investors to wait for cheaper levels to pour themselves some Peet's shares. Peet's is better on a watch list than in a portfolio.  

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Alyce Lomax owns shares of Starbucks. The Fool has a disclosure policy.


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  • Report this Comment On October 29, 2008, at 6:09 PM, LizbethGardner wrote:

    Uh...with all due respect, I can give you one big fat reason to pour yourself a 'cup' of the company's shares. (kind of a weird saying, actually!)

    the flavor. There are volumes of differences between the coffee companies and Peets is by FAR in a class all unto itself. do the research on your own.

    The freshness is uncompromised. (no, i'm not an employee, yes, I own stock, alot of it. there - that's my disclosure) They are smaller and simply not whored out to the masses.

    Comparing Starbucks to Peets is like comparing...a Lincoln to a well polished Mercedes Benz. One is much more flavorful and just classier than the other. sorry.

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