Cheaper coffee brews potential for Starbucks

Analysts say lower bean prices could add to profits in the next 2 years.

By Kim Peterson Mar 23, 2012 1:06PM
Image: Coffee Beans (© Purestock/SuperStock)The price of coffee has fallen to a 17-month low, and analysts say that will likely lift Starbucks' (SBUX) profit over the next two years.

Coffee prices have dropped more than 20% over six months. There are a couple of reasons. Coffee prices are naturally coming down from a pretty strong hike in recent years.

But more important is the crop expected out of Brazil, which will see its harvest in about three months. The Brazilian crop will help make up for a poor showing out of Columbia, where disappointing harvests are almost a chronic problem, Reuters reports.

Coffee investors are all over this and have pushed shares of Starbucks and Peet's Coffee & Tea (PEET) to fresh 52-week highs. Caribou Coffee (CBOU) has also soared.

Analysts at Jefferies were giving the stocks more of a boost Friday, reiterating a "buy" rating on all three. Analyst Andy Barish also upped the price targets on Starbucks to $62 and on Caribou to $24. He left Peet's alone at $88.

Barish thinks big coffee players are going to lock in as much 2013 supply as they can at current prices. "It is rare to see a category growing around the 8-10% delivered by specialty coffee, and we believe this can persist through 2013," he writes.

Jefferies thinks the lower coffee prices will reflect nicely in Starbucks' earnings. For the 2012 fiscal year, the analysts say, profit should go up by a penny per share to $1.85. Things look better in 2013, with per-share profit expected to rise by 10 cents to $2.35.

2Comments
Mar 23, 2012 6:51PM
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bill phillips - you are an idiot.  The article didn't say they were going to buy cheap coffee, it said the wholesale price of coffee is going down so the cost of the coffee they will buy will be less. 
There is a difference between less expensive coffee and a lower grade coffee.
Mar 23, 2012 6:25PM
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i will tell you this starbucks if you buy cheap coffee instead of keeping what you serve you will lose alot of coffee drinkers like myself i will just go back to folgers there is a old saying if it isn't broke don't fix it  i used to stop and different coffee houses and when they went to the cheaper coffee they went out of buiness the cheap sh#t is not going to cut it
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