Coffee at Home Is Money in the Bank

By Laura Cohn
Kiplinger’s Personal Finance
Sunday, July 26, 2009

With consumers shunning Starbucks and its $4 Frappuccinos, firms that make brew-at-home coffee products are reporting strong sales and steady profit as the recession drags on. In particular, producers and distributors of premium coffee beans and coffee makers are on a bit of a caffeine high.

More than half of adult Americans drink coffee, and more of them are starting their day with a shot of java at home. About 80 percent of coffee drinkers now make their own coffee , the National Coffee Association says. But instead of trading down to no-name brands, they’re imbibing the good stuff without shelling out extra money to have someone else brew it.

One beneficiary of the current trend is Peet’s Coffee & Tea. Praised by none other than Oprah Winfrey, Peet’s is growing rapidly. The number of grocery stores carrying its beans has doubled in four years, to more than 8,000. At its Friday close of $26.72, the stock traded at 27 times Peet’s estimated 2009 earnings of 99 cents a share. But Stifel Nicolaus analyst Steve West says Peet’s should experience “a good five years of growth,” driven mainly by the addition of more grocery customers.

The big winner in the coffee wars is Green Mountain Coffee Roasters, a hot seller of beans and brewers (particularly to Costco). At $68.65, Green Mountain stock has more than doubled over the past year and is up 140-fold since 1998. Green Mountain is expanding its reach with a new distribution agreement with Wal-Mart, enhancing future growth prospects, Canaccord Adams analyst Scott Van Winkle says.

Caribou Coffee — No. 2 to Starbucks, with about 500 coffee bars — has benefited from a shift in focus, increasing its sales to grocery stores and hotels. Shares of Caribou, which recently turned a profit for the first time since going public in 2005, soared from a low of $1.11 on Dec. 29 to $5.27 on Friday.

A conservative way to get in on the cheaper-java movement is to buy shares of McDonald’s, which at $56.08 go for just 15 times estimated ’09 earnings. The fast-food chain’s McCafe lattes are cheaper than those at Starbucks.

Starbucks, still the top coffee player, has a market value of $11 billion. The recession has hit Starbucks hard. True, it’s cutting costs by closing stores. But it needs a new source of growth.