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Coffee Wars: How Do You Take It?

Thursday, 10 Dec 2009 | 7:46 PM ET

You’d be hard pressed to get caffeine addicts to give up their coffee, but you might convince them to change the way they consume it. This battle is playing itself out as we speak, Cramer said during Thursday’s Mad Money, and the growing number of home brewers could knock one company out of favor.

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Peet’s Coffee & Tea and Green Mountain Coffee Roasters’ fight for Diedrich Coffee was more than just a bidding war. It was acknowledgement of a trend, namely the rise in popularity of the single-cup coffee maker. One in which Green Mountain, with its Keurig machine controlling 58% of the market, already is taking part. But Peet’s, which runs a chain of coffee shops, is not.

Unit sales of single-cup machines have been growing at an annual rate of 38.7%, compared to just 6.3% for coffee makers overall. And there’s plenty of growth still left to be had, as these brewers make up only 10% of total coffee maker sales.

What’s more, the real money is made in what are called coffee pods, or the individual servings used in single-cup machines. The business plan is to sell the machines relatively cheaply and then profit from consumers’ need for refills.

Branded Keurig pods are called K-cups. Green Mountain, which also owns about half of the single-cup coffee pod business, produces and sells 74% of K-cups on the market, collecting a nice 35% margin at the same time. The last quarter or so are companies that license the rights to produce K-cups.

That’s why Peet’s pushed so hard for Diedrich, the largest remaining independent licensed K-cup provider – to get in on the action. But Green Mountain, which has been buying up the licensees to consolidate K-cup distribution, tendered the higher bid, leaving Peet’s in a pretty tough spot.

If regulators approve the deal, Green Mountain will hold about 95% of the K-cup market. Peet’s meanwhile will be fighting competition on two sides, from both a resurgent Starbucks and the expanding ranks of home brewers using Green Mountain’s Keurig machine. It will be hard for Peet’s to accelerate growth, Cramer said, in that situation.

Not to mention, he likes GMRC’s valuation better, the stock trading at 24.1 times 2010 earnings with a 31.8% growth rate. Peet’s trades at a 19.5 multiple on next year’s numbers with a much smaller 22.3% growth rate.

“If you want a coffee shop, buy Starbucks,” Cramer said. “But if you’re looking for a growth coffee name, the stock to buy is Green Mountain.”

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