I am addicted to coffee. There, I said it! That morning cup of java energizes my day, and you'll rarely see my right hand devoid of a coffee mug. Unfortunately for investors, that same cup of joe is causing indigestion. There are simply too many companies to choose from in the coffee sector. I count four potential investment choices in the sector, but see only one true buying opportunity. Join me as I grind through these figures and show you why this is the only coffee stock worth considering.
Before we begin, let me introduce the contestants: Starbucks
Considering that commodity prices are soaring, and coffee prices have doubled over the past nine months, first and foremost I need to be reassured that my coffee stock can withstand the rising costs of coffee and potentially pass those costs along to the consumer. This immediately knocked out Caribou Coffee, which has significantly smaller operations compared to the other three. Caribou is extremely susceptible to rising coffee prices, and we've witnessed its current-year earnings estimates move rapidly lower in response. The other three haven't seen their estimates decline substantially.
Also important, I need to know that my coffee stock can grow earnings consistently over the long term and isn't a flash in the pan. Starbucks has been a true bright spot, growing its net income by nearly 15% over the past five years despite consumers tightening their wallets. Green Mountain has been no slouch either. Its net income has soared, as acceptance of its Keurig single-cup brewing system has given consumers a feasible at-home coffee option. Peet's Coffee has also shown growth in revenue and earnings in the past five years; all three move on.
Lastly, I need a company whose stock has the greatest chance to outperform. Peet's Coffee has indeed grown revenue, but recently its growth curve has flattened dramatically. Peet's has struggled to generate organic growth, translating into only high single-digit revenue growth. It is in potential talks to partner up with Green Mountain, but for the moment I'm going to exclude it. This leaves us with only Starbucks and Green Mountain.
The real differentiating factor left between the two remaining coffee juggernauts is their balance sheets. Green Mountain boasts $21 million in cash flow from operations over a trailing-12-month period while also carrying more than $1 billion in net debt. Starbucks, on the other hand, generated $1.6 billion in cash flow from operations in the trailing 12 months and maintains a $1.5 billion net cash position which it uses to pay out a 1.6% annual dividend. Starbucks' market cap is just about four times greater than Green Mountain's, but these figures depict a runaway winner.
If you're looking to grind out profits in the coffee sector, I can see no clearer play to put your portfolio in the black than Starbucks.
Taste aside, do you have a favorite play in the coffee sector? Share your thoughts in the comment section below and consider adding these stocks and your own portfolio to My Watchlist. Add Starbucks, Green Mountain Coffee Roasters, Peet's Coffee & Tea, and Caribou Coffee to My Watchlist.
Fool contributor Sean Williams does not own shares in any companies mentioned in this article. He has more used up Starbucks gift cards on his nightstand than there are playing cards in a deck. You can follow him on CAPS under the screen name TMFUltraLong. Peet's Coffee & Tea is a Motley Fool Big Short short-sale selection. Green Mountain is a Motley Fool Rule Breakers selection. Starbucks is a Motley Fool Stock Advisor pick. Motley Fool Alpha has opened a short position on Green Mountain. Motley Fool Options has recommended buying puts on Green Mountain. The Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy which is caffeine and mermaid-free.