PSB Monthly Issue August 2013
August 2013
When most people consider investing in a coffee company, the first thing that comes to mind is inevitably Starbucks (SBUX).
After all, the company is wildly popular with over 20,000 locations worldwide and an extremely recognizable name brand. Not to mention, the company has performed extremely well, pulling in $14.5 billion in annual revenues and $1.6 billion in profits.
Of course, we’re not looking to invest in mega-cap companies. As always, we’re looking for undervalued or under-appreciated small companies.
Here’s the thing…
The coffee industry, outside of SBUX, has been struggling. In fact, the price of coffee beans has declined over 30% since last year.
But, there’s still plenty of demand for coffee, especially quality coffee. How many times have you walked into a Starbucks and there hasn’t been a line?
It’s clear, the coffee culture continues to grow, both domestically and abroad.
And we’ve found the perfect company to invest in to take advantage of the potential upside of the coffee industry.
Introducing Coffee Holding Co (NASDAQ: JVA).
Name: Coffee Holding Co Ticker Symbol: JVA Market Cap: $43 million Recent Price: $6.82 PSB Rating System 4.6 Stars Raging Revenue: (4.5 stars) The company’s quarterly revenues decreased 1% year over year due to lower coffee prices, but new products/markets could be a big boost to future sales. Beautiful Books: (5.0 stars) JVA has over $7 million in cash, no debt, and a solid 3.6x current ratio. Clearly, the company is in good health. Stellar Structure: (4.2 stars) Institutional ownership is low at just 6%, while insider ownership is at 13%. This company is a good candidate to add additional institutional ownership. Valuation Verification: (4.7 stars) JVA is trading at just 9.5x projected earnings. That’s a bargain price, especially compared to the industry average price to earnings ratio which is more than double. Meaningful Milestones: (4.8 stars) JVA is expanding into the massive Chinese market and is introducing a new high end product to super-market shelves. Both scenarios could give a big boost to revenues and earnings. |
THE COFFEE BUSINESS
JVA is a provider of roasted and blended coffees in the US and Canada. The company offers three main products – wholesale green coffee, private label coffee, and branded coffee.
Wholesale green coffee consists of unroasted raw beans sold to roasters and coffee shop operators. Private label coffee is typically packaged and sold under various brand names for other companies. Finally, branded coffee is packaged coffee using one of JVA’s own brand names and sold to supermarkets, wholesalers, and individually owned stores.
There are several reasons to like the direction JVA’s headed.
First off, as I just mentioned, coffee prices have been in a significant downtrend. However, the price of coffee is well below its 200-day moving average and is due to revert to the mean. Chances are, especially with crop issues in Guatemala and Indonesia, coffee is due for a recovery.
More importantly, JVA has entered the Chinese market with a recent licensing agreement involving their Don Manual Colombian Coffee brand. And, China provides a massive market opportunity.
You see, coffee is still catching on as a mainstream drink in China, which has been traditionally dominated by tea. But the Chinese are slowly integrating Western culture into their society as the economy opens up, including coffee drinking.
And that’s not all…
JVA just announced a brand new product it’s rolling out to supermarkets, Premier Roasters coffee. It’s 100% Arabica coffee (the good kind) packaged in composite cans. These cans will keep the coffee fresher than traditional coffee packaging.
Not only is it the most upscale product offered by JVA to date, it’s also innovative. Management doesn’t believe there’s anything like this product currently in supermarkets. It could be a big hit with quality-conscious coffee buyers.
Clearly, the company has multiple opportunities to increase revenues (and profits). Now, let’s move on to the financials.
THE NUMBERS
JVA revenues and profits have been hurt by lower coffee prices. But, the damage isn’t extensive… more of a bump in the road. On the other hand, the company’s balance sheet is in great shape.
Last quarter’s revenues came in at $36.7 million, a 1% year over year decline. As I just mentioned, the slight drop in sales was almost entirely due to lower coffee prices. Lower prices also contributed to the company’s $0.06 per share loss for the quarter, roughly in line with the previous year.
Meanwhile, the company is holding $7.6 million in cash compared to zero debt. And, current assets are a robust 3.6x current liabilities. Plus, the company has strong operating cash flow of nearly $7 million a year.
In other words, the JVA is plenty healthy. As such, an increase in the price of coffee or sales of a higher margin product could make all the difference on the income side of things for the company.
INVESTMENT RISKS
As with any investment, JVA does have a few risks.
An unexpected slowdown in the economy could reduce demand for coffee and negatively impact JVA’s revenues.
A continued drop or sideways movement in the price of coffee could also pressure the company’s revenues and earnings.
Finally, new products from competitors could hurt revenues in a time when JVA is entering new markets and launching new brands.
POTENTIAL RETURN OF 100% OR MORE
JVA is set for a rebound. Coffee prices won’t stay depressed forever. And, the company is entering the lucrative Chinese market as well as launching a high end supermarket product.
But despite the clear upside potential, JVA shares are trading at just 9.5x projected earnings. Meanwhile, the company’s competitors are trading on average at 19x and 20x earnings. That means the share price could double if it just trades up to the industry average price to earnings ratio.
Not to mention, JVA is trading at a miniscule 0.29x revenues. That’s tiny for just about any industry, but especially in the coffee business.
Based on our analysis, we see JVA climbing to $13.50 a share or more. Buy the shares now for potential gains of 100% or higher!
ACTION RECOMMENDATION
BUY Coffee Holding Co (NASDAQ: JVA) up to $7.50 per share.
Recent price is $6.82.
Use a stop-loss of $5.00 on this position.
Don’t forget your position sizing and stop-loss rules.
Here are some highlights from the past couple weeks…
- Parker Drilling (PKD), Renewable Energy Group (REGI), and Aceto (ACET) have all hit new highs.
- Aceto (ACET) recently hit a peak return of 102%.
- With the recent negative earnings, we’ve decided to sell Cobra Electronics(COBR). Liquidate your COBR position now and we’ll conserve the capital for better opportunities.
Category: PSB Monthly Issues
