COFFEE HOLDING CO INC JVA
May 30, 2011 - 5:07am EST by
wan161
2011 2012
Price: 7.85 EPS $0.44 $0.76
Shares Out. (in M): 5 P/E 17.8x 10.3x
Market Cap (in $M): 43 P/FCF 14.8x 0.0x
Net Debt (in $M): -1 EBIT 4 5
TEV ($): 42 TEV/EBIT 9.6x 8.9x

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Description

Coffee Holding Co. JVA

Way down among Brazilians 
Coffee beans grow by the billions 
So they've got to find those extra cups to fill 
They've got a zillion tons of coffee in Brazil


The Coffee Song (They've Got An Awful Lot Of Coffee In Brazil) / Frank Sinatra

 

Coffee stocks have been getting a lot of investor attention lately, with names such as DDRX, GMCR and SBUX generating stunning returns for investors.  The company behind the Dunkin’ Donuts brand has an IPO in the works.  There are even at least two coffee ETFs, the iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN, ticker symbol JO and the iPath Pure Beta Coffee ETN, ticker CAFE. 

 

With all that attention you’d think the sector was probably overvalued.  There’s even a highly promoted pump and dump candidate, Jammin’ Java (JAMN) eloquently written up as a short-sale trade by fellow VICer “unkown345” assisted with Spy Magazine quality messages (that’s high praise, folks) by VICer “snarfy”. 

 

But in that pail of over-roasted beans there’s a high quality green Arabica nugget that hasn’t yet reached its peak of perfection.  This microcap shot of espresso goes by the unglamorous name of Coffee Holding Co., ticker JVA.  What makes this little-company-that-could-so attractive?

 

·         2nd highest top-line growth in the sector (20.1% QoQ revenue growth in the latest qtr, more than twice that of the comps median; second only to GMCR)

·         Revenues have grown an average of 13% per annum in the past four fiscal years and operating income has grown 31% per annum in the past four fiscal years.

·         Highest free cash flow yield in the sector (6.7% compared to 3.1% median for comps)

·         Lowest EV/EBIT multiple in the sector (9.6x, which is slightly more than half the comps median of 18.6x)

·         2nd lowest EV/Revenue multiple in the sector (.86x compares to 1.83x comps median)

·         Lowest forward P/E in the sector (10.3x compared to 19.1x median for comps)

·         One of only two companies in the sector that pays a dividend (the other being SBUX) and has the highest dividend yield in the sector (1.53%).

 

All of the above is true despite the recent run up in the price since the outstanding Q1 results.  Q2 results are expected out on June 6th.  In this write-up I look at JVA in relation to other pure-play coffee companies.  The comps I focus on are JAMN, FARM, PEET, CBOU, SBUX and GMCR.  I do not include diversified companies such as KFT, P&G, SJM, etc.

 

Overview

Coffee Holding Co., Inc. is a Staten Island, NY-based integrated coffee roaster and dealer that has been a family operated business for 40 years.  The Company was founded by Sterling Gordon in 1971; he is the father of the current executive team, Andrew Gordon (CEO/President/CFO) and David Gordon (EVP and COO).  The brothers have been working with the company for 28 and 30 years, respectively.  The Gordon brothers own 42.7% of the Company’s stock between them.  Their parents (Sterling Gordon & Rachelle Gordon) own 6.6% of the Company’s stock, so they all have a lot of skin in the game.  The Company went public in 2005 at $5 per share. 

 

Products fall in three categories: Wholesale Green Coffee, Private Label Coffee, and Branded Coffee.  The Company also has a food service business. 

 

Wholesale Green Coffee – this is the sale of unroasted beans from around the world that are sold to coffee roasters and coffee shop operators.  These include over 90 specialty coffee offerings, including Organic, Fair Trade, Rainforest Alliance and Utz Kapeh certified coffees. 

 

Private Label Coffee – coffee that’s roasted, blended and packaged by JVA and sold under the specs and names of others, including supermarkets that want to have their own brand to compete with national brands.

 

Branded Coffee – coffee roasted and blended to JVA’s own specifications and sold under the Company’s seven brand names in different segments of the market.  Brands include S&W Premium, Café Caribe, Via Roma, Café Supremo, Fifth Avenue, and Don Manuel.  The company recently discontinued its Entenmann’s brand. 

 

The Company has coffee processing capacity in Colorado and Ohio.  The Colorado facilities are located in La Junta and Rocky Ford.  The Company’s Ohio capacity is through its 60% ownership on Generations Coffee Company, LLC located in Brecksville, which is a JV set up in 2006 with Caruso’s Coffee, Inc.  The company sold its Brooklyn, NY location in October 2009 which reduced long-term operating expenses. 

 

 Green Mountain Coffee Roasters is JVA’s largest wholesale green coffee customer.  And while it operates without any formalized material agreements or long-term contracts with GMCR, it has an 18 year relationship with Green Mountain.  Sales to GMCR accounted for 47% of JVA’s net sales for the FYE October 31, 2010, up from 35% in 2009 and 32% in 2008. 

 

The Company’s growth strategy is based on selective acquisitions and alliances, targeting the growing Hispanic market, increasing penetration to existing customers, and developing the food service business. 

 

The JV with Caruso’s Coffee is an example of a successful alliance.  This JV has allowed the Company to pursue private label business, which it wasn’t in a position to pursue before the JV.  The May 2010 purchase of Organic Products Trading Company (OPTCO) is an example of a successful acquisition.  The Hispanic market is targeted with the Company’s Café Caribe and Café Supremo brands.  Increasing the Company’s penetration with existing customers is being accomplished by adding new brand names and products including specialty blends, private label value blends, specialty instant coffees, instant cappuccinos and hot chocolates, and tea line products.  The Company’s presence in the food service market is small, but growth is targeted by marketing to hotels, restaurants and office coffee service companies and by attending trade shows to build a national audience to market its food service products. 

 

After trading in a range for a number of years, the price of commodity increased dramatically starting in June 2010.On June 10, 2010 the near-term Coffee “C” contract for the benchmark Arabica coffee (KCA Comdty on Bloomberg) traded at a price of 140.35 (cents) per pound.  By the end of 2010 it was 240.65 and peaked at 305.15 on May 3, 2011.  It has since come off to 263.70.  Robusta coffee generally trades at 70% of the price of Arabica coffee.  The Company has generally been able to pass green coffee price increases through to customers.  In addition, JVA uses coffee futures and options to partially hedge against the effects of changes in coffee prices.  Profits and losses (realized and unrealized) from hedges flow through the cost of sales line.  Despite the hedges, the Company says it remains exposed to losses when prices move up or down significantly in a very short period of time.  

 

Sales increased 12.1% in FYE October 31, 2010 due to higher prices and an increase in pounds sold.  In the latest quarter (ended January 31, 2011), sales increased 20%, also reflecting higher prices and additional poundage sold.  Part of this increased quantity sold was a result of the OPTCO acquisition completed in May 2010.

 

The table below shows the financial performance of the company from FYE October 31, 2007 to the latest 12 month period.  I prefer to look at successive LTM periods to remove the impact of seasonality.

 

LTM Data

FYE

 

FYE

 

FYE

 

LTM

 

LTM

 

LTM

 

FYE

 

LTM

 

($millions)

31Oct07

%

31Oct08

%

31Oct09

%

31Jan10

%

30Apr10

%

31Jul10

%

31Oct10

%

31Jan11

%

Revenues

57.4

100

71.2

100

74.5

100

77.0

100

79.0

100

80.7

100

83.5

100

87.8

100

Cost of Sales

49.1

85.5

68.8

96.6

64.4

86.6

66.4

86.3

67.8

85.8

70.0

86.7

72.6

87.0

76.5

87.1

Gross Profit

8.3

14.5

2.4

3.4

10.0

13.4

10.5

13.7

11.2

14.2

10.7

13.3

10.9

13.0

11.3

12.9

SG&A

6.8

11.9

6.4

8.9

6.4

8.6

6.6

8.5

6.7

8.4

6.8

8.5

6.8

8.2

6.9

7.9

Operating Income

1.5

2.5

-3.9

-5.5

3.6

4.9

4.0

5.2

4.5

5.7

3.9

4.8

4.0

4.8

4.4

5.0

Interest Expense

0.1

0.2

0.1

0.2

0.3

0.3

0.3

0.3

0.2

0.3

0.2

0.3

0.2

0.3

0.3

0.3

Other Exp. (Inc.)

0.0

0.0

-0.1

-0.1

-2.1

-2.9

-2.1

-2.8

-2.1

-2.7

-2.1

-2.6

-0.1

-0.1

-0.3

-0.3

Pretax Income

1.4

2.4

-4.0

-5.7

5.5

7.4

5.8

7.6

6.4

8.1

5.8

7.2

3.9

4.6

4.3

4.9

Income Tax

0.4

0.7

-1.4

-2.0

2.2

2.9

2.3

3.0

2.5

3.2

2.3

2.8

1.5

1.8

1.4

1.6

Minority Interest

0.0

 

0.0

 

0.0

 

0.0

 

0.0

 

0.0

 

0.0

 

0.0

 

Net Income

0.9

1.6

-2.6

-3.6

3.3

4.4

3.5

4.5

3.9

4.9

3.5

4.3

2.4

2.9

2.9

3.3

Deprec. & Amort.

0.4

0.7

0.5

0.8

0.5

0.7

0.5

0.7

0.5

0.6

0.5

0.6

0.5

0.6

0.5

0.5

EBITDA

1.8

3.2

-3.4

-4.8

4.2

5.6

4.5

5.8

5.0

6.3

4.4

5.4

4.5

5.4

4.8

5.5

 

 

CapEx

0.7

1.1

0.3

0.5

0.2

0.3

0.2

0.3

0.2

0.3

0.3

0.4

0.4

0.4

0.4

0.5

Free Cash Flow

1.2

2.0

-3.7

-5.3

4.0

5.3

4.3

5.5

4.8

6.0

4.1

5.0

4.1

4.9

4.4

5.0

 

 

Valuation

The valuation table below highlights how cheap JVA is compared to its coffee peers on a number of metrics.  On EV/revenues, JVA is cheaper than all but Farmer Bros, which is a perennial loss maker, even at the operating income line.  

 

On EV/EBITDA and EMC/Net Income (P/E), JVA is cheaper than all but Caribou Coffee, though JVA is cheaper on than all on forward P/E (and it’s at half of Caribou’s forward P/E).  On FCF Yield it’s cheapest by far, and has nearly twice the FCF yield of its next closest coffee comp, SBUX. 

 

While its margins are lower than those of its peers, I believe this has something to do with sale since margins almost universally appear to be higher with sales.  Interestingly, with JVA’s low CapEx requirements and low D&A, its FCF as percentage of revenue is in the middle of the pack.

 

 

Jammin

 

Farmer

 

Peet's

 

Caribou

 

Star-

 

Green Mtn

 

 

 

Coffee

 

 

Java

Bros

Coffee

Coffee

bucks

Cof. Rstrs

 

Hldg Co.

 

Latest Q/E

31-Mar-11

03-Apr-11

03-Apr-11

03-Apr-11

26-Mar-11

 

03-Apr-11

 

Latest FYE

31-Jan-11

30-Jun-10

02-Jan-11

02-Jan-11

03-Oct-10

25-Sep-10

 

03-Oct-10

 

ticker

JAMN

FARM

PEET

CBOU

SBUX

GMCR

 

JVA

 

LTM Data

FYE

LTM

LTM

LTM

LTM

LTM

 

LTM

 

($millions)

31Jan11

%

31Mar11

%

3Apr11

%

3Apr11

%

3Apr11

%

26Mar11

%

 

 

31Jan11

 

Revenues

0.001

100

451.7

100

341.1

100

289.2

100

11,187

100

1,911

100

87.8

100

Cost of Sales

0.002

 

277.9

61.5

158.6

46.5

132.9

46.0

4,630

41.4

1,303

68.2

 

 

76.8

87.5

Gross Profit

-0.001

173.7

38.5

182.5

53.5

156.3

54.0

6,557

58.6

609

31.8

11.0

12.5

SG&A

0.151

 

233.1

51.6

151.1

44.3

144.3

49.9

5,082

45.4

386

20.2

 

 

6.6

7.6

Operating Income

-0.151

-59.3

-13.1

31.4

9.2

12.0

4.1

1,475

13.2

222

11.6

4.4

5.0

Interest Expense

0.9

0.2

0.0

0.4

0.1

32

0.3

26

1.4

0.3

0.3

Other Expense (Inc.)

 

 

-7.9

-1.8

0.0

0.0

0.0

0.0

-185

-1.7

6

0.3

 

 

-0.3

-0.3

Pretax Income

-0.151

-52.3

-11.6

31.4

9.2

11.6

4.0

1,628

14.6

191

10.0

4.3

4.9

Income Tax

0.6

0.1

11.4

3.3

-21.3

-7.3

531

4.7

77

4.0

1.4

1.6

Minority Interest

 

 

 

 

 

 

0.5

 

2

 

0

 

 

 

0.0

 

Net Income

-0.151

 

-53.0

-11.7

20.0

5.9

32.4

11.2

1,095

9.8

113

5.9

 

 

2.9

3.3

Deprec. & Amort.

0.0

 

31.2

6.9

18.0

5.3

14.0

4.8

540

4.8

75

3.9

 

 

0.5

0.5

EBITDA

-0.2

-28.1

-6.2

49.5

14.5

26.0

9.0

2,015

18.0

298

15.6

4.8

5.5

 

 

 

CapEx

0.0

 

24.2

5.4

10.8

3.2

8.7

3.0

495

4.4

1,164

60.9

 

 

0.4

0.5

Free Cash Flow

-0.2

-52.3

-11.6

38.7

11.3

17.3

6.0

1,519

13.6

-866

-45.3

4.4

5.0

 

 

 

Shares O/S

70.79

16.21

12.82

20.56

749.60

150.39

 

5.5

 

Share Price

2.04

10.37

52.22

10.91

36.46

82.54

 

7.9

 

Equity Mkt Cap (EMC)

144.4

168.0

669.3

224.4

27,330

12,413.0

 

43.1

 

Net Debt (Cash)

0.0

8.1

-43.6

-25.9

-1,816

917.8

 

-1.2

 

Enterprise Value ("EV")

144.5

176.2

625.7

198.5

25,514

13,330.8

 

Mean

Median

41.9

 

 

 

 

EV/Revenues

NMF

.39

1.83

.69

2.28

6.97

 

2.4

1.83

.48

 

EV/EBITDA

Neg

 

Neg

 

12.7

 

7.6

 

12.7

 

44.8

 

19.4

12.7

8.7

 

EV/EBIT

Neg

 

Neg

 

19.9

 

16.6

 

17.3

 

59.9

 

28.4

18.6

9.6

 

EMC/Net Income

Neg

 

Neg

 

33.5

 

6.9

 

25.0

 

109.7

 

43.8

29.2

15.0

 

Bloomberg Fwd P/E    

Neg

Neg

18.0x

20.3x

17.2x

38.8x

 

23.6x

19.1x

10.3x

 

 

 

 

Cash From Ops

-0.2

19.1

4.2

26.0

7.6

15.6

5.4

1,416.6

12.7

49.4

2.6

3.3

3.8

CapEx

0.0

24.2

5.4

10.8

3.2

8.7

3.0

495.3

4.4

163.9

8.6

0.4

0.5

FCF

-0.2

-5.1

-1.1

15.2

4.5

6.9

2.4

921.3

8.2

-114.5

-6.0

2.9

3.3

FCF Yield

Neg

Neg

2.3%

3.1%

3.4%

Neg

 

2.9%

3.1%

6.7%

 

 

 

 

Latest Qtrly Y/Y

 

 

     Sales Growth

NMF

5.2%

9.0%

7.8%

9.9%

52.7%

 

16.9%

9.0%

20.1%

 

 

 

 

 

 

 

 

 

 

 

 

*PF for acqs

 

 

 

 

 

 

Liquidity

Another point worth mentioning is JVA’s net cash position.  Cash on the balance sheet exceeds the modest amount drawn under the credit line.  JVA’s cash generation is highlighted by the fact that it’s one of only two of the group that pays a dividend (and it’s got the highest dividend yield in the group). 

 

I believe as JVA carries on with its strategy of selective acquisitions, growth through targeting the high growth Hispanic market, increased penetration of existing customers and expanding its food service business, its number will continue to improve and the stock will continue its ascent.  While it’s had a nice run since earnings were released in March, it still has room to run, as highlighted by the valuation table above.

Catalyst

Continuation of strategy: top line growth through acquisitions, targeting high growth demographics, increased penetration, expanding food service business.  Management has lots of skin in the game and is incentivized to keep executing.  Market remains focused on coffee stocks, and upcoming Dunkin' Donuts IPO will probably give a shot of espresso to the sector.

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    Description

    Coffee Holding Co. JVA

    Way down among Brazilians 
    Coffee beans grow by the billions 
    So they've got to find those extra cups to fill 
    They've got a zillion tons of coffee in Brazil


    The Coffee Song (They've Got An Awful Lot Of Coffee In Brazil) / Frank Sinatra

     

    Coffee stocks have been getting a lot of investor attention lately, with names such as DDRX, GMCR and SBUX generating stunning returns for investors.  The company behind the Dunkin’ Donuts brand has an IPO in the works.  There are even at least two coffee ETFs, the iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN, ticker symbol JO and the iPath Pure Beta Coffee ETN, ticker CAFE. 

     

    With all that attention you’d think the sector was probably overvalued.  There’s even a highly promoted pump and dump candidate, Jammin’ Java (JAMN) eloquently written up as a short-sale trade by fellow VICer “unkown345” assisted with Spy Magazine quality messages (that’s high praise, folks) by VICer “snarfy”. 

     

    But in that pail of over-roasted beans there’s a high quality green Arabica nugget that hasn’t yet reached its peak of perfection.  This microcap shot of espresso goes by the unglamorous name of Coffee Holding Co., ticker JVA.  What makes this little-company-that-could-so attractive?

     

    ·         2nd highest top-line growth in the sector (20.1% QoQ revenue growth in the latest qtr, more than twice that of the comps median; second only to GMCR)

    ·         Revenues have grown an average of 13% per annum in the past four fiscal years and operating income has grown 31% per annum in the past four fiscal years.

    ·         Highest free cash flow yield in the sector (6.7% compared to 3.1% median for comps)

    ·         Lowest EV/EBIT multiple in the sector (9.6x, which is slightly more than half the comps median of 18.6x)

    ·         2nd lowest EV/Revenue multiple in the sector (.86x compares to 1.83x comps median)

    ·         Lowest forward P/E in the sector (10.3x compared to 19.1x median for comps)

    ·         One of only two companies in the sector that pays a dividend (the other being SBUX) and has the highest dividend yield in the sector (1.53%).

     

    All of the above is true despite the recent run up in the price since the outstanding Q1 results.  Q2 results are expected out on June 6th.  In this write-up I look at JVA in relation to other pure-play coffee companies.  The comps I focus on are JAMN, FARM, PEET, CBOU, SBUX and GMCR.  I do not include diversified companies such as KFT, P&G, SJM, etc.

     

    Overview

    Coffee Holding Co., Inc. is a Staten Island, NY-based integrated coffee roaster and dealer that has been a family operated business for 40 years.  The Company was founded by Sterling Gordon in 1971; he is the father of the current executive team, Andrew Gordon (CEO/President/CFO) and David Gordon (EVP and COO).  The brothers have been working with the company for 28 and 30 years, respectively.  The Gordon brothers own 42.7% of the Company’s stock between them.  Their parents (Sterling Gordon & Rachelle Gordon) own 6.6% of the Company’s stock, so they all have a lot of skin in the game.  The Company went public in 2005 at $5 per share. 

     

    Products fall in three categories: Wholesale Green Coffee, Private Label Coffee, and Branded Coffee.  The Company also has a food service business. 

     

    Wholesale Green Coffee – this is the sale of unroasted beans from around the world that are sold to coffee roasters and coffee shop operators.  These include over 90 specialty coffee offerings, including Organic, Fair Trade, Rainforest Alliance and Utz Kapeh certified coffees. 

     

    Private Label Coffee – coffee that’s roasted, blended and packaged by JVA and sold under the specs and names of others, including supermarkets that want to have their own brand to compete with national brands.

     

    Branded Coffee – coffee roasted and blended to JVA’s own specifications and sold under the Company’s seven brand names in different segments of the market.  Brands include S&W Premium, Café Caribe, Via Roma, Café Supremo, Fifth Avenue, and Don Manuel.  The company recently discontinued its Entenmann’s brand. 

     

    The Company has coffee processing capacity in Colorado and Ohio.  The Colorado facilities are located in La Junta and Rocky Ford.  The Company’s Ohio capacity is through its 60% ownership on Generations Coffee Company, LLC located in Brecksville, which is a JV set up in 2006 with Caruso’s Coffee, Inc.  The company sold its Brooklyn, NY location in October 2009 which reduced long-term operating expenses. 

     

     Green Mountain Coffee Roasters is JVA’s largest wholesale green coffee customer.  And while it operates without any formalized material agreements or long-term contracts with GMCR, it has an 18 year relationship with Green Mountain.  Sales to GMCR accounted for 47% of JVA’s net sales for the FYE October 31, 2010, up from 35% in 2009 and 32% in 2008. 

     

    The Company’s growth strategy is based on selective acquisitions and alliances, targeting the growing Hispanic market, increasing penetration to existing customers, and developing the food service business. 

     

    The JV with Caruso’s Coffee is an example of a successful alliance.  This JV has allowed the Company to pursue private label business, which it wasn’t in a position to pursue before the JV.  The May 2010 purchase of Organic Products Trading Company (OPTCO) is an example of a successful acquisition.  The Hispanic market is targeted with the Company’s Café Caribe and Café Supremo brands.  Increasing the Company’s penetration with existing customers is being accomplished by adding new brand names and products including specialty blends, private label value blends, specialty instant coffees, instant cappuccinos and hot chocolates, and tea line products.  The Company’s presence in the food service market is small, but growth is targeted by marketing to hotels, restaurants and office coffee service companies and by attending trade shows to build a national audience to market its food service products. 

     

    After trading in a range for a number of years, the price of commodity increased dramatically starting in June 2010.On June 10, 2010 the near-term Coffee “C” contract for the benchmark Arabica coffee (KCA Comdty on Bloomberg) traded at a price of 140.35 (cents) per pound.  By the end of 2010 it was 240.65 and peaked at 305.15 on May 3, 2011.  It has since come off to 263.70.  Robusta coffee generally trades at 70% of the price of Arabica coffee.  The Company has generally been able to pass green coffee price increases through to customers.  In addition, JVA uses coffee futures and options to partially hedge against the effects of changes in coffee prices.  Profits and losses (realized and unrealized) from hedges flow through the cost of sales line.  Despite the hedges, the Company says it remains exposed to losses when prices move up or down significantly in a very short period of time.  

     

    Sales increased 12.1% in FYE October 31, 2010 due to higher prices and an increase in pounds sold.  In the latest quarter (ended January 31, 2011), sales increased 20%, also reflecting higher prices and additional poundage sold.  Part of this increased quantity sold was a result of the OPTCO acquisition completed in May 2010.

     

    The table below shows the financial performance of the company from FYE October 31, 2007 to the latest 12 month period.  I prefer to look at successive LTM periods to remove the impact of seasonality.

     

    LTM Data

    FYE

     

    FYE

     

    FYE

     

    LTM

     

    LTM

     

    LTM

     

    FYE

     

    LTM

     

    ($millions)

    31Oct07

    %

    31Oct08

    %

    31Oct09

    %

    31Jan10

    %

    30Apr10

    %

    31Jul10

    %

    31Oct10

    %

    31Jan11

    %

    Revenues

    57.4

    100

    71.2

    100

    74.5

    100

    77.0

    100

    79.0

    100

    80.7

    100

    83.5

    100

    87.8

    100

    Cost of Sales

    49.1

    85.5

    68.8

    96.6

    64.4

    86.6

    66.4

    86.3

    67.8

    85.8

    70.0

    86.7

    72.6

    87.0

    76.5

    87.1

    Gross Profit

    8.3

    14.5

    2.4

    3.4

    10.0

    13.4

    10.5

    13.7

    11.2

    14.2

    10.7

    13.3

    10.9

    13.0

    11.3

    12.9

    SG&A

    6.8

    11.9

    6.4

    8.9

    6.4

    8.6

    6.6

    8.5

    6.7

    8.4

    6.8

    8.5

    6.8

    8.2

    6.9

    7.9

    Operating Income

    1.5

    2.5

    -3.9

    -5.5

    3.6

    4.9

    4.0

    5.2

    4.5

    5.7

    3.9

    4.8

    4.0

    4.8

    4.4

    5.0

    Interest Expense

    0.1

    0.2

    0.1

    0.2

    0.3

    0.3

    0.3

    0.3

    0.2

    0.3

    0.2

    0.3

    0.2

    0.3

    0.3

    0.3

    Other Exp. (Inc.)

    0.0

    0.0

    -0.1

    -0.1

    -2.1

    -2.9

    -2.1

    -2.8

    -2.1

    -2.7

    -2.1

    -2.6

    -0.1

    -0.1

    -0.3

    -0.3

    Pretax Income

    1.4

    2.4

    -4.0

    -5.7

    5.5

    7.4

    5.8

    7.6

    6.4

    8.1

    5.8

    7.2

    3.9

    4.6

    4.3

    4.9

    Income Tax

    0.4

    0.7

    -1.4

    -2.0

    2.2

    2.9

    2.3

    3.0

    2.5

    3.2

    2.3

    2.8

    1.5

    1.8

    1.4

    1.6

    Minority Interest

    0.0

     

    0.0

     

    0.0

     

    0.0

     

    0.0

     

    0.0

     

    0.0

     

    0.0

     

    Net Income

    0.9

    1.6

    -2.6

    -3.6

    3.3

    4.4

    3.5

    4.5

    3.9

    4.9

    3.5

    4.3

    2.4

    2.9

    2.9

    3.3

    Deprec. & Amort.

    0.4

    0.7

    0.5

    0.8

    0.5

    0.7

    0.5

    0.7

    0.5

    0.6

    0.5

    0.6

    0.5

    0.6

    0.5

    0.5

    EBITDA

    1.8

    3.2

    -3.4

    -4.8

    4.2

    5.6

    4.5

    5.8

    5.0

    6.3

    4.4

    5.4

    4.5

    5.4

    4.8

    5.5

     

     

    CapEx

    0.7

    1.1

    0.3

    0.5

    0.2

    0.3

    0.2

    0.3

    0.2

    0.3

    0.3

    0.4

    0.4

    0.4

    0.4

    0.5

    Free Cash Flow

    1.2

    2.0

    -3.7

    -5.3

    4.0

    5.3

    4.3

    5.5

    4.8

    6.0

    4.1

    5.0

    4.1

    4.9

    4.4

    5.0

     

     

    Valuation

    The valuation table below highlights how cheap JVA is compared to its coffee peers on a number of metrics.  On EV/revenues, JVA is cheaper than all but Farmer Bros, which is a perennial loss maker, even at the operating income line.  

     

    On EV/EBITDA and EMC/Net Income (P/E), JVA is cheaper than all but Caribou Coffee, though JVA is cheaper on than all on forward P/E (and it’s at half of Caribou’s forward P/E).  On FCF Yield it’s cheapest by far, and has nearly twice the FCF yield of its next closest coffee comp, SBUX. 

     

    While its margins are lower than those of its peers, I believe this has something to do with sale since margins almost universally appear to be higher with sales.  Interestingly, with JVA’s low CapEx requirements and low D&A, its FCF as percentage of revenue is in the middle of the pack.

     

     

    Jammin

     

    Farmer

     

    Peet's

     

    Caribou

     

    Star-

     

    Green Mtn

     

     

     

    Coffee

     

     

    Java

    Bros

    Coffee

    Coffee

    bucks

    Cof. Rstrs

     

    Hldg Co.

     

    Latest Q/E

    31-Mar-11

    03-Apr-11

    03-Apr-11

    03-Apr-11

    26-Mar-11

     

    03-Apr-11

     

    Latest FYE

    31-Jan-11

    30-Jun-10

    02-Jan-11

    02-Jan-11

    03-Oct-10

    25-Sep-10

     

    03-Oct-10

     

    ticker

    JAMN

    FARM

    PEET

    CBOU

    SBUX

    GMCR

     

    JVA

     

    LTM Data

    FYE

    LTM

    LTM

    LTM

    LTM

    LTM

     

    LTM

     

    ($millions)

    31Jan11

    %

    31Mar11

    %

    3Apr11

    %

    3Apr11

    %

    3Apr11

    %

    26Mar11

    %

     

     

    31Jan11

     

    Revenues

    0.001

    100

    451.7

    100

    341.1

    100

    289.2

    100

    11,187

    100

    1,911

    100

    87.8

    100

    Cost of Sales

    0.002

     

    277.9

    61.5

    158.6

    46.5

    132.9

    46.0

    4,630

    41.4

    1,303

    68.2

     

     

    76.8

    87.5

    Gross Profit

    -0.001

    173.7

    38.5

    182.5

    53.5

    156.3

    54.0

    6,557

    58.6

    609

    31.8

    11.0

    12.5

    SG&A

    0.151

     

    233.1

    51.6

    151.1

    44.3

    144.3

    49.9

    5,082

    45.4

    386

    20.2

     

     

    6.6

    7.6

    Operating Income

    -0.151

    -59.3

    -13.1

    31.4

    9.2

    12.0

    4.1

    1,475

    13.2

    222

    11.6

    4.4

    5.0

    Interest Expense

    0.9

    0.2

    0.0

    0.4

    0.1

    32

    0.3

    26

    1.4

    0.3

    0.3

    Other Expense (Inc.)

     

     

    -7.9

    -1.8

    0.0

    0.0

    0.0

    0.0

    -185

    -1.7

    6

    0.3

     

     

    -0.3

    -0.3

    Pretax Income

    -0.151

    -52.3

    -11.6

    31.4

    9.2

    11.6

    4.0

    1,628

    14.6

    191

    10.0

    4.3

    4.9

    Income Tax

    0.6

    0.1

    11.4

    3.3

    -21.3

    -7.3

    531

    4.7

    77

    4.0

    1.4

    1.6

    Minority Interest

     

     

     

     

     

     

    0.5

     

    2

     

    0

     

     

     

    0.0

     

    Net Income

    -0.151

     

    -53.0

    -11.7

    20.0

    5.9

    32.4

    11.2

    1,095

    9.8

    113

    5.9

     

     

    2.9

    3.3

    Deprec. & Amort.

    0.0

     

    31.2

    6.9

    18.0

    5.3

    14.0

    4.8

    540

    4.8

    75

    3.9

     

     

    0.5

    0.5

    EBITDA

    -0.2

    -28.1

    -6.2

    49.5

    14.5

    26.0

    9.0

    2,015

    18.0

    298

    15.6

    4.8

    5.5

     

     

     

    CapEx

    0.0

     

    24.2

    5.4

    10.8

    3.2

    8.7

    3.0

    495

    4.4

    1,164

    60.9

     

     

    0.4

    0.5

    Free Cash Flow

    -0.2

    -52.3

    -11.6

    38.7

    11.3

    17.3

    6.0

    1,519

    13.6

    -866

    -45.3

    4.4

    5.0

     

     

     

    Shares O/S

    70.79

    16.21

    12.82

    20.56

    749.60

    150.39

     

    5.5

     

    Share Price

    2.04

    10.37

    52.22

    10.91

    36.46

    82.54

     

    7.9

     

    Equity Mkt Cap (EMC)

    144.4

    168.0

    669.3

    224.4

    27,330

    12,413.0

     

    43.1

     

    Net Debt (Cash)

    0.0

    8.1

    -43.6

    -25.9

    -1,816

    917.8

     

    -1.2

     

    Enterprise Value ("EV")

    144.5

    176.2

    625.7

    198.5

    25,514

    13,330.8

     

    Mean

    Median

    41.9

     

     

     

     

    EV/Revenues

    NMF

    .39

    1.83

    .69

    2.28

    6.97

     

    2.4

    1.83

    .48

     

    EV/EBITDA

    Neg

     

    Neg

     

    12.7

     

    7.6

     

    12.7

     

    44.8

     

    19.4

    12.7

    8.7

     

    EV/EBIT

    Neg

     

    Neg

     

    19.9

     

    16.6

     

    17.3

     

    59.9

     

    28.4

    18.6

    9.6

     

    EMC/Net Income

    Neg

     

    Neg

     

    33.5

     

    6.9

     

    25.0

     

    109.7

     

    43.8

    29.2

    15.0

     

    Bloomberg Fwd P/E    

    Neg

    Neg

    18.0x

    20.3x

    17.2x

    38.8x

     

    23.6x

    19.1x

    10.3x

     

     

     

     

    Cash From Ops

    -0.2

    19.1

    4.2

    26.0

    7.6

    15.6

    5.4

    1,416.6

    12.7

    49.4

    2.6

    3.3

    3.8

    CapEx

    0.0

    24.2

    5.4

    10.8

    3.2

    8.7

    3.0

    495.3

    4.4

    163.9

    8.6

    0.4

    0.5

    FCF

    -0.2

    -5.1

    -1.1

    15.2

    4.5

    6.9

    2.4

    921.3

    8.2

    -114.5

    -6.0

    2.9

    3.3

    FCF Yield

    Neg

    Neg

    2.3%

    3.1%

    3.4%

    Neg

     

    2.9%

    3.1%

    6.7%

     

     

     

     

    Latest Qtrly Y/Y

     

     

         Sales Growth

    NMF

    5.2%

    9.0%

    7.8%

    9.9%

    52.7%

     

    16.9%

    9.0%

    20.1%

     

     

     

     

     

     

     

     

     

     

     

     

    *PF for acqs

     

     

     

     

     

     

    Liquidity

    Another point worth mentioning is JVA’s net cash position.  Cash on the balance sheet exceeds the modest amount drawn under the credit line.  JVA’s cash generation is highlighted by the fact that it’s one of only two of the group that pays a dividend (and it’s got the highest dividend yield in the group). 

     

    I believe as JVA carries on with its strategy of selective acquisitions, growth through targeting the high growth Hispanic market, increased penetration of existing customers and expanding its food service business, its number will continue to improve and the stock will continue its ascent.  While it’s had a nice run since earnings were released in March, it still has room to run, as highlighted by the valuation table above.

    Catalyst

    Continuation of strategy: top line growth through acquisitions, targeting high growth demographics, increased penetration, expanding food service business.  Management has lots of skin in the game and is incentivized to keep executing.  Market remains focused on coffee stocks, and upcoming Dunkin' Donuts IPO will probably give a shot of espresso to the sector.

    Messages


    SubjectEV/Revenue typo
    Entry05/30/2011 01:17 PM
    Memberwan161
    In my bullet points I said:
     
    "2nd lowest EV/Revenue multiple in the sector (.86x compares to 1.83x comps median)". 
     
    That was a typo, JVA actually trades at .48x revenues compared to 1.83x for the peers.  The correct ratio is on the valuation table.

    SubjectThe Coffee Song
    Entry05/30/2011 01:21 PM
    Memberwan161
    Shold have included this earlier.  Link to The Coffee Song:
     
     
     

    SubjectBlowout Q2 results - stock up 37.5% today
    Entry06/09/2011 12:52 PM
    Memberwan161
    Coffee Holding Co. (JVA) reported fiscal Q@ results this morning.  Sales in Q2 were up 87% from higher prices, add'l sales of green coffee to new customers, and inclusion of results from the OPTCO acquisition completed May 2010.  GAAP EPS for Q2 grew 46.7%.  The earnings growth wasn't from some non-recurring voodoo, it was from increased gross profit. 
     
    Gross margin shrunk because of a greater proportion of sales of green coffee (lower margin product) and inclusion of sales from the OPTCO acquisition (also lower margin than company's roasted coffees).
     
    Here's a chart showing JVA's trading multiples for LTM data (updated for the results announced this morning) as well as for run rate data, annnualizing the latest quarter's results:
    (Apologies for sloppy formatting - VIC doesn't carry over formatting properly from my spreadsheet)
     
    Points to note.  On LTM basis JVA is still trading well below multiples of comps (see comp chart in main write-up).  On run-rate basis, it's silly cheap compared to peers, though I don't have run-rate multiples to show for the comps.  But 8.3x EBITDA and 8.8x EBITA for a company that is growing its top-line so rapidly is a steal.  Some of that top-line growth is from consolidation of OPTCO results this year when it wasn't there last year, but that only accouunts for part of it.  You're still getting heavy double digit organic top line growth for multiples you'd expect to pay for single-digit top line growth.  The only metric thaat looks poor is FCF yield, which is kinda lumpy quater-to-quarter, and reflects net working capital usage of a high growth company.
     
      Coffee   Coffee  
      Hldg Co.   Hldg Co.  
    Latest Q/E 03-Apr-11   03-Apr-11  
    Latest FYE 03-Oct-10    
    ticker JVA   JVA  
    LTM Data LTM   Q2E 30Apr11  
    ($millions) 30Apr11   Annualized  
    Revenues 105.2 100 149.3 100
    Cost of Sales 93.1 88.5 134.9 90.4
    Gross Profit 12.0 11.5 14.4 9.6
    SG&A 7.1 6.8 7.1 4.8
    Operating Income 4.9 4.7 7.2 4.9
    Interest Expense 0.3 0.3 0.2 0.2
    Other Expense (Inc.) -0.3 -0.2 0.0 0.0
    Pretax Income 4.8 4.6 7.0 4.7
    Income Tax 1.6 1.5 2.3 1.5
    Minority Interest 0.0   0.0  
    Net Income 3.3 3.1 4.8 3.2
    Deprec. & Amort. 0.5 0.4 0.4 0.3
    EBITDA 5.4 5.1 7.7 5.1
         
    CapEx 0.5 0.5 0.6 0.4
    EBITDA-CapEx 4.9 4.6 7.1 4.7
         
    Shares O/S 5.5   5.5  
    Share Price 11.69   11.69  
    Equity Mkt Cap (EMC) 64.2   64.2  
    Net Debt (Cash)  -0.4   -0.4  
    Enterprise Value ("EV") 63.8   63.8  
         
    EV/Revenues .61   .43  
    EV/EBITDA 11.9   8.3  
    EV/EBIT 13.0   8.8  
    EMC/Net Income 19.7   13.5  
    Bloomberg Fwd P/E      15.4x   15.4x  
         
    Cash From Ops 2.2 2.1 -1.4
    CapEx 0.5 0.5 0.6
    FCF 1.7 1.6 -2.0
    FCF Yield 2.6%   -3.1%  
         
    Latest Qtrly Y/Y    
         Sales Growth 87.4%   87.4%  
           

    SubjectNot Q2E 30Apr11; actual Q2 30Apr11 annualized
    Entry06/09/2011 12:56 PM
    Memberwan161
    Sloppy on my part.  Chart on message I just posted it says "Q2E 30Apr11 annualized"  It's not Q2E, it's Q2 actual annualized.
     
    I'm gonna go play The Coffee Song by Frank Sinatra a few times now.
    "da da da, dat da dada"

    SubjectRE: Not Q2E 30Apr11; actual Q2 30Apr11 annualized
    Entry06/09/2011 01:06 PM
    Membermajic06
    wow, well done

    SubjectTidbits from JVA 10-Q filed y'day
    Entry06/10/2011 12:55 PM
    Memberwan161
    I've had a chance to review the JVA 10-Q that was filed yesterday for the fiscal 2nd Q/E 30Apr11.  The pro-forma results of ops show sales, net income and EPS of the company if the acquisition of OPTCO had been completed before the beginning of the year ago comp period.  What it shows for Q211 over Q210 is sales up 68.7% pro-forma versus up 87.4% actual.  So the jump in sales is really 18.8% from the inclusion of OPTCO this year when it wasn't last year, and the other 68.7% is actual sales increase from higher prices and additional volume of green coffee sold.  68.7% organic sales growth.  Pretty impressive.
     
    Similarly, pro-forma net income for Q211 over Q210 was up 33.8% compared to a 48.4% actual, so 14.6% of the net income increase was from the inclusion of OPTCO results in Q211 that wasn't there in Q210; the other 33.8% net income growth was organic.
     
    FYI, the purchase price of OPTCO on May 17, 2010 was $2.6 million.  $2.3mm was in cash with the balance in shares of JVA.
     
    The organic net income increase wasn't as high as the organic sales increase because of the higher sales of lower margin green coffee, as I mentioned yesterday.
     
    53% of sales in the quarter came from one customer, which we know is GMCR.  They're a big buyer of green coffee from JVA.  This is obviously a risk, but the companies have a long-term relationship and GMCR needs JVA.  GMCR is firing on all cylinders with turbo boost.  It's got an $11 billion market cap.  Frankly, if I were GMCR, I'd buy JVA for a deal that would be core, highly accretive, and cheap.  GMCR trades at 52x forward earnings while JVA is at 20x forward earnings that are stale (not updated for recent uptick in outlook), so it's really trading in the teens on a forward P/E basis.  No brainer for GMCR.  Probably resistance at JVA to sell since it's still a kind of family business and the guys running it are still young, and it's all they've ever done.
     
    Other bits from the 10-Q and the earnings press release:
     
    -even during a very high growth period there was an increase in cash on the balance sheet.  Cash went up and the line of credit balance went down over the first six months of the fiscal year.
     
    -JVA has been able to increase price to keep pace with the rising priced of green coffee.
     
    -higher green coffee prices are driving many small and medium roasters to JVA as new customers.  Instead of these roasters buying green coffee from their conventional sources, they're coming to JVA with its wide variety of beans, so JVA has picked up a bunch of new customers.
     
    -JVA attended a second selling show in China during the quarter and believes it is sowing the seeds of a new customer base down the road.  The company has already completed its first few sales into China.
     
    -SJM has purchase Cafe Bustelo and Cafe Pilon, two dominant brands that compete with JVA's Cafe Caribe and Cafe Supremo brands. These four brands are aimed at the Hispanic market, but JVA feels SJM's purcahse of Bustelo and Pilon could push these brands into the mainstream, getting more attention from retailers as well as customers.
     
    Not from the 10-Q, but an observation:
    The daily average price of KC1 Commodity (The near term coffee "C" contract for Arabica coffee) during fiscal Q211 was 271 (cents per pound) versus 132 for the same period in 2010 for a 105% increase.  For Q311 to date, the daily average of KC1 has been 270 (though trending down) while during the full fiscal Q310 it was 150, for an 80% increase.  If the price stays where it is now (263) for the rest of Q311, the average for Q311 will be 267, a 78.5% increase.  So I expect fiscal Q311 results to be pretty strong too, though perhaps not as much of a year on year increase, unless the momentum of new small/medium customers coming to JVA continues at a strong enough pace. 
     
    Shares are up $2.71 to $14.85 today in a very ugly tape, but I wouldn't close out position yet.   Even at the current price JVA trades at around the same EV/EBITDA and EV/EBIT multiples as comps average, and a lower P/E (all using LTM figures), but with much higher growth.
     

    SubjectClosing out JVA
    Entry07/01/2011 11:17 AM
    Memberwan161
    I recommend exiting JVA.  I sold my position at $16.50.  Stock isn't expensive, but on balance, the margin of safety has shrunken dramatically from when I made the recommendation on May 30, 2011.  Stock is up $8.65, or 110% in 32 days, and multiples are in the range of peers.  Even though JVA has much higher growth than most peers, it's still a microcap, and it now gets >50% of its revenue from one customer (GMCR).  While I don't see the relationship with GMCR changing anytime soon, there's still a risk having so much business with one party, so while the stock still looks cheap relative to peers on price/growth basis, the microcap status and GMCR customer concentration kind of balance it all out so that it makes sense for me to take my coffee beans off the table and settle up with the barista. 
    Hope some of you were onboard for this caffeine rush! 

    Subjectprice spike
    Entry07/12/2011 11:21 AM
    Membersugar
    This thing is incredible. Any thoughts around at what price you might short it?

    SubjectRE: price spike
    Entry07/13/2011 07:08 AM
    Memberwan161
    I dont like to short stocks on valuation alone.  Especially with a microcap company where the executives own 43 percent. I prefer to short where there's overvaluation plus a catalyst to crack the valuation.  The market can stay irrational a lot longer than you can stay solvent, the old saying goes.
     
    In terms of valuation JVA is certainly expensive now.  At last night's close of $22.37 JVA is trading at 25x trailing twelve months EV/EBITDA and 28x EV/EBIT.  Much more expensive than all comps except GMCR and almost twice the EBITDA multiple of SBUX.  So on a valuation basis JVA is too expensive. 
     
    But I'm not a big fan of shorting something like this because if I had shorted it at $22 on the way up, I'd have been wretching and dry heaving when it traded over 30 - and probably would have covered up there to end the torture.  Spikes are the nature of microcaps sometimes.  I'd much rather play something like this with options, if they're available (as with one fellow VICer's brilliant CHBT trade a month or two ago).
     
    Even large caps can spike and cause intense pain.  Anyone remember the VW Ord vs. Pref debacle in 2008?  It literally put hedge funds out of business and caused billions in losses. 
     

    SubjectRE: party in Staten Island
    Entry07/14/2011 12:56 PM
    Memberwan161
    Not surprising about the insider selling.  They've seen their share price rise 7-fold since the beginning of the year and triple since the day before Q2 earnings.
     
    This was very high on my list of stocks to go parabolic, or at least go up, for all the reasons I highlighted in my write-up.  I just didn't expect it to happen quite so soon after posting my idea.  But all the ingredients were there for me.  Strong sector with a lot of investor interest, modest valuation compared to peers, attractive FCF yield, management with skin in the game, growing top line, positive earnings surprise in prior quarter that looked like it could be repeated, etc.  My one reservation was that as a micro-cap the market might not pay attention so much even if the company executed well and revenue/earnings continued to improve.  Glad to see the market's not afraid to reward good performance even to a company that had a market cap of only $43mm when I wrote it up.
     
    Another reason it went parabolic is, frankly, because stupid momentum-oriented retail investors piled in after the good results of Q2.  As it kept going up they kept piling in.  We've all seen this movie before.  Eventually it cracks.  But these investors serve a purpose.  They push price discovery to an illogical extreme, at least temporarily, allowing the rest of us with more level heads to exit at attractive levels.

    SubjectRE: Updated Thoughts?
    Entry10/03/2011 09:53 PM
    Memberwan161
    The world has changed since my write-up.   The Russell Microcap Consumer Staples index (RGMICS on Bloomberg) has dropped over 28% from its peak on July 1 and Arabica coffee (KC1 Commodity on Bloomberg) has dropped nearly 23% from its peak on September 1st, and is now back to levels not seen since December 2010.  In late September, JVA sold 890K new shares (increasing share count by 16.2%) and 267K unlisted warrants, raising $8.7mm.  At the same time, the CEO and CFO separately sold 200K of their own shares.
     
    With coffee prices down so much it's likely JVA's future revenue from green coffee sales will drop in future quarters since it was the increasing price of green coffee that drove small, independent buyers to move to JVA for green coffee purchases.   What's alarming about Q3 results, which came out September 13, is that revenues declined sequentially by $1.6mm or 4.2%.  This hasn't happened since Q2 2010, and it was a much smaller sequential decline then. 
     
    So the massive sales growth we've seen for the past number of quarters peaked with Q2 11 and is now starting to decline.  We may see a sequential pop in Q4 since KC1 ran up, but then ran down to the low price we see now, but subsequent to the October 31 fiscal year end, I think results will be more muted with lower coffee prices and lower green coffee sales. 
     
    LTM EBITDA peaked at $5.4mm in fiscal Q2.  It's now at a trailing $4.9mm and probably goes into the low 4s as we get into the next fiscal year.  Using $4.25mm for next year's EBITDA and taking the higher share count into account, at the current price the company's trading at 10x EBITDA.  Not cheap enough for me.  I'd wait for it to go below $6 before considering getting back in.  At $5.75 it would be at 7.5x next year's EBITDA.  Seems like a more reasonable valuation for re-entry.
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