Peet's buys Diedrich, coffee stocks stay hot

Is it too late to get in on these coffee stocks? And what about Starbucks?

By InvestorPlace Nov 3, 2009 10:12PM
By Louis Navellier

woman drinking coffeeThe big merger headline this week came from Warren Buffett’s huge buyout of Burlington Northern Sante Fe (BNI), which sent BNI shares up 20%.

But this is not the merger story I'm watching. The merger with the real profit opportunity for investors is much smaller. And instead of trains, it's coffee.

Peet’s Coffee & Tea (PEET) announced late Monday that it’s buying out tiny Diedrich Coffee (DDRX) for $26 a share. When I say Diedrich is tiny, I’m not exaggerating. The company has a total of just 149 employees. By comparison, Burlington Northern has 40,000.
But don’t let the size fool you. The Peet’s-Diedrich buyout is a good deal for investors in both companies. Diedrich’s business is focused on the K-Cups for the Keurig single-cup brewing system, and Peet’s clearly wants in on this lucrative business.

In March, Diedrich made the smart decision to sell off its Gloria Jean's stores and focus instead on K-Cups, the single-cup coffee pods that fit into Green Mountain Coffee Roasters' (GMCR) popular Keurig system. With the increasing demand for specialty coffees in homes, restaurants and offices, this has proven to be a savvy strategy.

Indeed, the Keurig single-cup brewing system for office and home use is one of the reasons I also recommend Green Mountain Coffee Roasters stock. The way Amazon (AMZN) liberated consumers from going to the bookstore, Keurig has liberated folks from going to their local Starbucks (SBUX) to buy over-roasted and overpriced coffee. This is changing the entire business model.

Due to report earnings next Wednesday Green Mountain has a nice habit of creaming Wall Street’s earnings estimates and seeing its shares jump on the news.

Wall Street currently expects 33 cents a share, which is a big increase from last year’s Q3 net of 19 cents a share. GMCR has told investors to expect 30 to 34 cents a share. Personally, I would be surprised if GMCR made anything less than 36 cents a share. Green Mountain is an outstanding buy.

More Earnings From Strong Coffee Companies

Starbucks has the name recognition in the coffee business, and it’s impossible to have a discussion about coffee without including this company. SBUX is due to report fiscal fourth-quarter earnings on Thursday.

Starbucks ran into some problems over the past few years. The company simply over-expanded. For five straight quarters, Starbucks experienced declining year-over-year earnings, which was unthinkable just a few years ago.

The good news is that Starbucks has worked to close many stores and keep costs down. In July, Starbucks said that it expects to earn 74 to 75 cents a share for 2009. That means that company sees this earnings report coming in at 19 or 20 cents a share. The Street expects 21 cents a share, and that seems right to me.

The question for Starbucks is: What does the future hold? The company has said to expect 13% to 18% growth for next year. That’s very good in this environment, and I continue to rate Starbucks a buy.

Another big name in the coffee business is Caribou Coffee (CBOU). Caribou reports after the market closes tomorrow and is another coffee stock I have rated as a strong buy. And between you and me, I also think it’s possible that this will be the next buyout candidate.

The company had been hemorrhaging money, but lately Caribou has turned into the black. Last year, Caribou lost 45 cents a share for the third quarter, which was more than twice the loss Wall Street was expecting.

The last three quarters have shown profits, and so should this one. Wall Street expects a penny per share, but I lean towards a modest earnings surprise. Shares traded as low as $1.10 last November, but are well above $8 a share today.

Even after this incredible run of more than 600%, CBOU is an excellent buy right now.

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