Between the hours of 6 a.m. and 4 p.m., all I drink is coffee. I don't know if I'd call myself a connoisseur, but living in Seattle, I feel blessed with vast amounts of coffee knowledge almost through osmosis. Not surprisingly, coffee stocks are one of my favorite sectors to follow because it contains companies I can easily understand and get a taste for (insert laughter here).
All joking aside though, not every coffee stock is the right flavor for investors. Last year both I and Foolish colleague Rick Munarriz warned about the dangers of Jammin Java, a company with no revenue that had amassed a $400 million valuation. The stock wound up being ground into bits shortly thereafter.
That leads me to Caribou Coffee (Nasdaq: CBOU ) , which reported its fourth-quarter results after the bell last night.
The company, which owns coffeehouses but also has commercial partnerships to sell its coffee, reported sales growth of 19% for the quarter and a 5.6% rise in same-store sales. Profit for the quarter came in at $0.14 -- edging out Wall Street's estimate by $0.01 -- and was helped out by a 69% rise in commercial and enterprise sales derived largely from its K-Cup partnership with Green Mountain Coffee Roasters (Nasdaq: GMCR ) . For fiscal 2012, Caribou forecast net sales growth of 10%, same-store sales growth of 2% to 4%, and EPS in the range of $0.48 to $0.51.
Not too bad, right? Not so fast...
Consider first that, despite the rapid growth of its commercial and franchise sales, these are lower-margin, higher-cost business segments. In the fourth quarter, cost of sales and occupancy-related costs rose 36% (nearly double the sales growth). Operating expenses also increased by 6%, although they lessened as a percentage of revenue. If rising costs continue to outpace growth, Caribou could run into serious problems.
Without question, higher coffee prices played a part in Caribou's shrinking margins. We've seen nearly every company in the sector affected by higher prices. Starbucks (Nasdaq: SBUX ) in early January was forced to raise prices in certain regions due to rising coffee prices. Similarly, Peet's Coffee & Tea (Nasdaq: PEET ) has needed to raise its prices to counter soaring coffee costs.
Finally, comparing Caribou's valuation to some of its peers, I just don't see how buying the stock here would make sense. The company's implied same-store sales growth is in the range of 15% to 57% below what it grew in 2011, and its predicted EPS range implied a forward P/E of 34 to 37. There just isn't enough growth or cost control to support this type of valuation. Starbucks has a lower forward multiple and a faster projected growth rate in 2012 than Caribou -- and pays a dividend to top it off. Even Peet's, which is by no means cheap, is forecast to grow at the same pace as Caribou but trades at only 30 times forward earnings.
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