Why I'm Putting Real Money Behind Teavana

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This article is part of our Real-Money Stock Picks series.

The U.S. has a pretty entrenched coffee culture. However, maybe it's time we all calmed down just a bit and enjoyed a slower, mellower beverage ritual. The latest company I'm purchasing for the real-money stock portfolio I'm managing for is trying to bring an overflowing cup of coffee's less high-powered sibling to American consumers: Teavana Holdings (NYSE: TEA  ) .

Like another recent stock purchase I made for the portfolio, SodaStream (Nasdaq: SODA  ) , Teavana shares have recently fallen to a level that looks like a great value given compelling future growth potential.

The business
Founded by current Chairman and CEO Andrew Mack in 1997, Atlanta-based Teavana brings the high-end tea experience to upscale North American malls. Roughly 200 Teavana stores sell loose-leaf tea blends, artisanal accoutrements like tea pots, cups, and mugs, and other tea-related merchandise.

Teavana's stores offer more than 100 blends of premium loose-leaf tea with names like Strawberry Bliss, Liquid Gold, and Samurai Chai, using white, green, oolong, black, herbal, rooibos, and mate teas. And how can one resist at least trying Monkey Picked Oolong, with its allegedly complex yet light orchid aroma? (My own curiosity is piqued for sure.)

Although customers can buy made-to-order hot or cold teas made in Teavana stores, the real focus is to sell loose-leaf teas for home consumption rather than encourage customers to hang out, socialize, and drink tea.

Teavana's website says it only carries teas "with rich flavors and superior health benefits" in its stores, which were originally visualized to be part Tea Bar, part Tea Emporium. The company's goal is to create a "heaven of teas."

The good news is that many types of teas ostensibly have positive health effects like antioxidant properties from flavonoids, and many Americans are embracing more healthy living and consumption habits.

The bad news is that Americans are fairly fixated on coffee as the perfect complement to fast-paced, competitive lifestyles. Teavana's IPO prospectus pointed out that in 2009, tea represented $56.6 billion in global sales, and America represented a scant 9% of that figure.

Why I'm buying
When I first looked at Teavana in January, I simply thought the share price was too expensive given risky elements I'll mention later. The shares have since dropped to a price I believe is far more palatable.

As I mentioned in my most recent exploration of Teavana, there's really no pure-play competitor or peer for comparison. You could argue it's somewhat similar to Starbucks (Nasdaq: SBUX  ) , Green Mountain Coffee Roasters (Nasdaq: GMCR  ) , or Hain Celestial (Nasdaq: HAIN  ) , but not purely comparable.

Starbucks seeks to offer a place for hardcore coffee drinkers and aficionados; Green Mountain is focused on its razor/blades in-home brewers; Hain Celestial sells foods including Celestial Seasonings teas. Celestial Seasonings is, of course, sold in tea bags through mainstream grocers.

For the sake of comparison, though, we can see how Teavana's multiples stack up. Teavana shares are now trading at just 17 times forward earnings. That compares favorably to Starbucks' 23 times forward earnings and Hain Celestial's forward price-to-earnings ratio of 24.

Green Mountain's cheaper, trading at a mere 7 times forward earnings, but that company has so many problems these days it's difficult to keep track.

Even better from a value perspective, Teavana's PEG ratio is now 0.71, signaling an undervalued stock.

Teavana believes it can open at least 500 stores by fiscal 2015, as well as expand its Internet presence to educate customers and provide another sales channel for its products.

And now, the risks
In a way, it's good news that the U.S. isn't completely amped up on tea at the moment. If specialty tea consumption takes off in a big way, the future growth potential for Teavana is huge. However, that's easier said than done. Like I said, America tends to be pretty obsessed with coffee, occasionally reaching for a plain old iced tea (or even sweet tea for Southerners).

Let's suffice it to say, when most Americans think of tea, they're not really looking for something that, according to lore, has been picked by monkeys trained by Buddhist monks.

Like my recent pick SodaStream, there's the challenge (and opportunity) to expand in America, and also similarly, an awful lot of competitors vie for Americans' attention. Go to your local grocer and check out the selection on the shelves. You'll find everything from Lipton, Bigelow, Twinings, and Tetley, to the aforementioned Celestial Seasonings and Starbucks' Tazo tea brand, as well as all kinds of other choices with far less name recognition but a fair amount of the exotic factor.

On the other hand, if Starbucks could change the way Americans thought of their old, cheap cups of joe, then it's possible tea could catch on with a wider variety of consumers willing to pay up for a premium tea experience, too. The fact that Starbucks is doing something big and trying out a stand-alone Tazo tea shop this fall could ultimately be good news for tea in general, as well as companies like Teavana. Maybe tea time is coming back to America.

Teavana's corporate governance leaves a bit to be desired. As much as I adore founder-led companies, Andrew Mack owns 55.1% of the company's shares, which means shareholder votes on topics aren't ever going to add up to a majority. The company also has a classified board of directors.

Foolish bottom line
My real-money stock portfolio keeps socially responsible investing in mind. Although Teavana doesn't have a huge laundry list of corporate social responsibility initiatives, it does donate 1% of all its tea profits every year to poverty-alleviating organization CARE. Meanwhile, tea's health properties make it one of the more noble consumables. Given the stock's cheap price, I say it's tea time.

Teavana still has a long road ahead of it, though, and if you prefer a more established retailer parroting a proven model from a top domestic retailer, look no further than The Motley Fool's Top Stock for 2012. It's our chief investment officer's highest-conviction pick for the year, and it may be yours too after reading more about the company by clicking here now.

Alyce Lomax owns shares of Starbucks in her personal portfolio. The Motley Fool owns shares of Starbucks, SodaStream International, and The Hain Celestial Group. Motley Fool newsletter services have recommended buying shares of Starbucks, Green Mountain Coffee Roasters, SodaStream International, and The Hain Celestial Group. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended writing covered calls on Starbucks. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (7) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 05, 2012, at 7:36 PM, ravens9111 wrote:

    chart looks like new lows coming soon

  • Report this Comment On July 06, 2012, at 2:56 AM, matthewluke wrote:

    I was waiting the whole article to find out where the socially responsible part of this real money pick came into play. Got to the end and it seems like the 1% profit donation is extent of it. Is that right?

    I'm not turning up my nose at a charitable donation of any amount to a worthy cause. Not at all. 1% of profits to charity is great. But there are tons of companies that donate 1% or more of their profits to charity. Is that the only rational for this socially responsible pick? Because like you mentioned, their corporate governance isn't exactly the best around.

  • Report this Comment On July 06, 2012, at 3:55 PM, TMFLomax wrote:

    Hi WhichStocksWork,

    I hear your point here. I do try to usually pick these stocks that have been more proactively socially responsible. However, I believe tea is a harmless commodity, and while I would rather see some better corporate governance, for the most part I don't feel like this company is a force for evil or anything. And some SRI portfolios only screen out the really negative/damaging companies and everything else is pretty much fair game.

    Again, I'd rather have far more actively SRI companies in here, but I feel Teavana does no harm (unless there's something I'm missing).

    Thanks for asking -- these are all the good discussions when working within this investing universe.



  • Report this Comment On July 06, 2012, at 4:37 PM, ElCid16 wrote:

    "tea is a harmless commodity"

  • Report this Comment On July 09, 2012, at 4:10 PM, TMFLomax wrote:

    Thanks for posting, ElCid16. I suppose I shouldn't be surprised by that...

  • Report this Comment On July 09, 2012, at 11:19 PM, matthewluke wrote:

    Thanks for your reply, Alyce. I did my own homework over the weekend (as I hadn't paid much attention to Teavana since the IPO). Liked what I read. Bought some shares Monday morning.

  • Report this Comment On July 09, 2012, at 11:27 PM, matthewluke wrote:

    Also, I do love me some tea. Living in Japan, I think it might be against the law to not drink at least one cup a tea a day. I'm not a lawyer though, so I could be mistaken, haha.

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