This Coffee Stock Is No Starbucks

Warning! Consuming too many shares of coffee bean purveyor Coffee Holding (Nasdaq: JVA) has been shown in Motley Fool labs to stunt your portfolio's growth.

As a high-flying favorite of speculators in the coffee sector, Coffee Holding was priced for perfection prior to its earnings report yesterday. The way I saw it, anything short of phenomenal revenue and earnings growth was going to be taken as a disappointment -- and that's precisely what investors got, a heaping dose of disappointment.

For the quarter, Coffee Holding earned $0.03 while watching revenue soar 88% over the year-ago period. The only problem is that the company earned $0.08 in the year-ago period with significantly better margins. The company blamed the lackluster results on greater sales of lower-margin green coffee versus its higher-margin roasted coffee. In addition to lower margins, Coffee Holding also suffered a $1.2 million loss attributed to marking its options to market value during the quarter.

As has long been my greatest beef with Coffee Holding, the company reported yet another quarter of rising expenses and relatively weak cash flow. As I detailed back in July, the company then had less than $1 million in levered free cash flow over the trailing 12-month period. While this quarter showed improvement, cost of sales stood at 94.2% of net sales, which is a hefty jump from the 87.1% it reported last year. The company also hasn't produced more than $2 million in free cash flow in a given year since 2004, yet it again approved a dividend payout of $0.03 to shareholders.

Another concern I have for current shareholders is Coffee Holding's reliance on Green Mountain Coffee Roasters (Nasdaq: GMCR) for approximately half of its revenue. With Green Mountain's growth and earnings running wild, it's a bit disconcerting that Coffee Holding is having trouble maintaining a profit and keeping its margin even level with the year-ago period despite these huge revenue increases.

This leads back to the most important aspect of investing: The bottom line matters. Revenue increases are meaningless if they don't translate into growth of the bottom line. While you may not want to hear it, direct competitors like Starbucks (Nasdaq: SBUX) and Peet's Coffee & Tea (Nasdaq: PEET) are significantly safer and more profitable choices for your portfolio. These two companies have considerably more diverse revenue streams and sport unmistakably stronger gross margins than Coffee Holding. While a case can be made that Coffee Holding is a growth story in the making, I'm more inclined to believe it's the grounds at the bottom of my coffee cup.

The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks and Green Mountain Coffee Roasters, creating a short position in Peet's Coffee & Tea, and creating a lurking gator position in Green Mountain Coffee Roasters.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article, but he is the very proud owner of an original Starbucks umbrella. You can follow him on CAPS under the screen name TMFUltraLong 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.