Please ensure Javascript is enabled for purposes of website accessibility

This Beverage Stock Is Heating Up Nicely

By Evan Niu, CFA – Updated Apr 6, 2017 at 8:03PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Forget coffee, have some tea.

Coffee stocks have been hot lately, maybe even a little too hot. Wouldn't it be great to find the next Green Mountain Coffee Roasters (Nasdaq: GMCR) before it becomes a 10-bagger? Coffee isn't the only beverage that's brewing profits for investors.

Shares of Teavana Holdings (NYSE: TEA) are fresh off the press after going public last month. The company has been posting some pretty strong numbers and has been profitable since 2008. Total revenue has increased from $33.8 million to $124.7 million over the last four years, representing 38.6% compound annual growth. Over the same time frame, both gross and net margin have been steadily expanding. Gross margin has risen from 52.8% to 62.9%, while net margin improved from negative 4% to positive 9.6% in the year ending January.

The company estimates that size of the domestic tea market at $5.2 billion, leaving plenty of opportunity for growth. Teavana's retail footprint is still fairly small with only 161 locations in the U.S., and it is targeting at least 500 stores by 2015, including 50 in fiscal 2011.

Comparable-store sales growth has almost tripled over the past three years, from 3% to 8.7%. This has helped drive up sales per gross square foot from $866 to $994. And with almost no debt, Teavana certainly looks a lot more attractive than fellow recent IPO, Dunkin' Brands (Nasdaq: DNKN), which is burdened with $1.9 billion in debt.

Steep international opportunities                                                                    
Teavana does not have any substantial operations outside of the U.S., and interestingly its only international franchise locations are in Mexico, which has even lower per-capita tea consumption than the U.S. The global tea market, excluding the U.S., is estimated at $51.4 billion, which would significantly broaden the potentially addressable market by nearly tenfold.

Per-capita tea consumption in Asia and Europe is much higher than in the U.S. and Mexico, so that would seem to be the next clear direction for international expansion, since Teavana has no locations in the Eastern hemisphere. However, the company hasn't disclosed any specific plans yet.

Teavana's founder, Andrew Mack, started the company in 1997 and currently serves as chairman and CEO. He still retains roughly 57.9% of outstanding shares, which may not be considered particularly shareholder-friendly.

Teavana's market cap currently sits right at $1 billion, with a P/E of 77.4 . This valuation may seem a little rich for some, but it looks just right to me when looked at within the context of the company's strong fundamentals and growth potential.

Fool contributor Evan Niu holds no position in any company mentioned. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of and creating a lurking gator position in Green Mountain, as well as shorting Green Mountain. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Keurig Green Mountain, Inc. Stock Quote
Keurig Green Mountain, Inc.
GMCR.DL
Dunkin' Brands Group, Inc. Stock Quote
Dunkin' Brands Group, Inc.
DNKN

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
339%
 
S&P 500 Returns
109%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.