A Bull Market Brews In All Things Coffee
Always on the hunt for a bull market, Cramer on Wednesday turned his attention to all things coffee. After all, shares of both Starbucks and Peet's Coffee & Tea reached new highs Wednesday while Green Mountain Coffee Roasters flirted with its 52-week high.
"These hyper-caffeinated stocks are so hot they're scalding," Cramer said. "With the upcoming IPO of Dunkin Donuts coming next month, I think it will generate even more interest in the group and possibly move the valuation benchmarks for coffee stocks higher."
So what's the best way to play this bull market? Cramer looked at Starbucks , Green Mountain , Peet's and Caribou Coffee .
Starbucks: Cramer first got behind this stock in July 2009 when the company decided to slow its new store growth and instead, focus on making its existing stores more profitable. Since then, the stock has posted a 129 percent gain and he thinks it has more room to run. After all, the company dominates the coffee business in terms of domestic market share. But its international growth is what's most impressive and promising to Cramer. The Seattle-based company is focusing on expanding throughout Asia. It currently has 400 stores in mainland China, but it hopes to grow to 1,500 stores by 2015. It also plans to double its store count in Korea.
SBUX may be trading near its highs, but Cramer noted it sells for 22 times earnings with 18 percent growth. He thinks it's a cheap stock at under $40 a share.
Green Mountain: This Waterbury, Vt.-based company makes the Keurig-brand, single-cup coffee brewer, among other products. Cramer said the single-cup business the "fastest-growing" aspect of the coffee industry right now. In 2008, the single-cup business was just 2 percent of the total coffee market, but it's since grown into the low teens. Green Mountain also sells the 'K-cup' that the Keurig uses to make coffee. So it sells the Caribou, Dunkin Dounuts, Folgers and Starbucks brand coffees, making it a play on a variety of brands.
With Keurig in up to 9 percent of all U.S. households, Cramer doesn't think the product is a "flash in the pan." Cramer thinks the product will only continue to gain in popularity and as the number of Keurigs increases, Green Mountain will get more of its sales from the higher-margin 'K-cups.' He likened it to the razor/razorblade business model, in which a company will sell a product, usually for little to no cost, that's complimented by another product that the consumer has to buy over and over again. That business model allowed the company's gross margins — the percentage of every dollar of sales that becomes profit — increased by 400 basis points to 37.5 percent in the latest quarter.
GMCR currently sells for 40 times earnings, but Cramer thinks it's relatively inexpensive given it's growing earnings by 35 percent.
Caribou: With headquarters in Brooklyn Center, Minn., Caribou has 530 locations spread mainly throughout the Midwest. In August 2008, Michael Tattersfield took over as CEO after having served as chief operations officer at Lululemon . Given the success of the yoga apparel retailer, Cramer thinks Tattersfield knows how to build a brand that consumers are attracted to. Under Tattersfield's leadership, Cramer said Caribou is growing its store count in markets where it already operates, including Chicago, Minneapolis and Washington, D.C.
Cramer warned that Caribou is a very speculative stock. He pointed out that it's also inexpensive, selling for 28 times earnings with a 21 percent growth rate.
Peet's: This Emeryville, Calif.-based company has 192 stores, which are mostly located in the West Coast and Northeast regions of the U.S. Cramer said he would stay away from this stock, though. He thinks it could be a terrific regional to national story, but instead of growing its store count, the company is focusing on expanding its consumer packaged coffee business. But the fastest-growing part of that business is the single-serve coffee, Cramer said. Peet's doesn't have a partnership with Green Mountain, so he thinks it will be tough for it to break into that business.
Cramer doesn't like Peet's stock price either. It currently sells at 33 times earnings with 18 percent growth. Starbucks also has 18 percent growth, Cramer said, but it sells at just 22 times earnings.
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