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
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
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
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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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He has been ordering the same drink at Starbucks for 16 years. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks and Green Mountain Coffee Roasters, as well as writing covered calls in Starbucks and creating a lurking gator position in Green Mountain Coffee Roasters. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 that never needs caffeine.