Hot Coffee Stocks Have Gone Cold: Is a Refill Coming?

Hot Coffee Stocks Have Gone Cold
Hot Coffee Stocks Have Gone Cold

Just a few months ago, coffee-related companies were as hot as a steaming cup of joe.

Buoyant coffee bean prices, a growing consumer appetite for premium coffee, and a few company-specific events fueled a rally in the niche.

  • Starbucks (SBUX) struck a licensing deal with Keurig parent Green Mountain Coffee Roasters (GMCR) to begin marketing Starbucks-branded K-Cup refills for Green Mountain's single-serve coffee machines. By next year, Starbucks will be selling K-Cups and Keurig brewing systems in its stores.

  • Dunkin' Donuts parent Dunkin' Brands (DNKN) went public this summer, and it wouldn't have been possible if it wasn't for the strong reputation of Dunkin' Donuts' coffee. Investors wouldn't have bid up the offering if this was simply about fatty doughnuts.

  • An obscure penny stock that began the year at 55 cents a share -- Jammin' Java -- traded as high as $6.35 in May. The company was posting insignificant revenue, but a promotional newsletter pumped up a Bob Marley family connection and consumer fascination with premium coffee.

Reality is pouring out a stronger cup these days. Dunkin' Brands began this trading week below the $28.39 close of its summertime debut. Green Mountain has shed nearly 40% of its peak value as skeptics have gone public with patent expirations and accounting concerns. Once the hype was decaffeinated, Jammin' Java dropped back down to being a penny stock again.

Easy come, easy joe.

Mocha Markdowns

Two of the bigger names in premium coffee -- Starbucks and Peet's Coffee (PEET) -- report their quarterly results this week.

Analysts don't expect these events to be jubilant outings. They see Peet's and Starbucks posting slightly lower earnings than they did during the same quarter last year. Wall Street pros see both companies still growing their revenue, but not at their earlier frenetic paces.

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Despite its busy stores and promising expansion prospects overseas, Starbucks is expected to post a mere 4% uptick in sales when it reports on Thursday.

One can always argue that Starbucks is a victim of the McCafe-ization of the country. McDonald's (MCD) has been serving up lattes, cappuccinos, and iced caramel mochas for two years. The drive-thru convenience and lower price points at Mickey D's should be weighing on Starbucks, but they're not. Comparable-store sales -- a metric that weighs a combination of foot traffic and patron spending trends -- have been largely positive at Starbucks during the McCafe era.

If anything, McCafe has helped educate the market on the finer points of barista-served brews.

Revenge of the Java Junkies

Even with its recent slide, Green Mountain was one of the market's biggest winners. The Vermont-based coffee company's stock has been a 20-bagger over the past five years. In other words, the stock has appreciated by 2,000% on a split-adjusted basis.

Green Mountain has been a scorching speedster on the strength of its Keurig platform. It isn't the only company offering a proprietary single-serving solution. Senseo and Kraft's (KFT) Tassimo also serve up premium hot beverages, but consumers flocked to Keurig to anoint it -- and its signature K-Cup refills -- the king of one-cup brews.

There are two key K-Cup patents that expire next year, but Green Mountain has spent the past couple of years snapping up its biggest K-Cup suppliers, building a second-generation Keurig brewer, and getting big names including Starbucks, Dunkin' Donuts, and Caribou Coffee (CBOU) to hop on the K-Cup bandwagon.

An accounting snafu that's been lingering for a year and the stock's lofty valuation made it a tempting target for hedge fund legend David Einhorn, who went public during a recent value investing conference to spell out his shorting thesis for Green Mountain -- 110 presentation slides in all.

Skittish investors didn't need to ask for slide No. 111. They bailed, undoing the last of the fast-growing coffee stocks.

Beans bounce back

Premium coffee is just too easy to score these days. Snapping a K-Cup into a Keurig brewer at home or in the office break room, driving through one of the many fast-food joints that have beefed up their warm beverages, or taking a shorter walk to your neighborhood barista as Starbucks saturates the market makes upscale brews perhaps too accessible.

This is naturally welcome news to fans of good coffee, but not to investors hoping that the niche becomes a steamy hotbed of growth again.

There are still some reasons to believe that coffee stocks won't be down forever.

  • Starbucks can always deliver better than expected results on Thursday. After all, store-level sales popped 8% in its previous quarter, powered by a 6% spike in traffic and a 2% in average ticket per customer.

  • Green Mountain can burn shorts by continuing to post market thumping growth, overcoming its patent concerns with new machines, and clearing the air to overcome iffy accounting allegations.

  • Dunkin' Brands went public with a lot of West Coast real estate left to conquer. Analysts are also upbeat about its growth, targeting a profit of $0.89 a share this year and $1.17 a share come 2012.

The market may be decaffeinated on coffee stocks these days, but it doesn't mean that it will last.

Longtime Fool contributor Rick Munarriz does not own shares in any stocks in this article. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks, McDonald's, and Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters.

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