Tuesday, June 29, 2010

Coffee Holding (JVA) microcap in the booming Coffee Markets

I see a lot of opportunities everywhere so also in the U.S.. China Investor King is mainly of course a blog that writes about Chinese companies. Sometimes I come across companies that are not Chinese but are anyway interesting bait. One of those companies that I investigated is an American coffee company that could be an interesting play for the microcap value investor that is patient and knows waiting some years can be more profitable to the investment.


While studies abound for the potential health benefits of coffee and tea consumption, questions remain about the bioavailability of the compounds they contain.

While the overall market for antioxidants was estimated to be worth $12bn (€8.8bn) in 2009, according to Euromonitor International, the combined markets of tea and coffee are much bigger, valued at over $70bn in retail sales a year for coffee and about $1 bn for tea.

Coffee and tea are two of the most commonly consumed beverages in the world and thus represent a significant opportunity to positively affect disease risk and outcomes globally, wrote Mario Ferruzzi from Purdue University in a recent paper in Physiology & Behavior (doi: 10.1016/j.physbeh.2010.01.035). He added:
A better understanding of how the beverage composition impacts phenolic profiles and their bioavailability is critical to development of beverage products designed to deliver specific health benefits.

Ferruzzi notes that coffee is one of the richest sources of polyphenols in the Western diet, with one cup of the stuff providing 350 milligrams of phenolics. Of these, the most abundant compounds coffee are chlorogenic acids, making up to 12 per cent of the green coffee bean. The most abundant of these compounds is caffeic acid.

The conclusion is that the consumption of coffee can get a boost the coming years if more studies publish the major health benefits that drinking three cups a day can have. I have been wondering which companies can profit from it the most and are still relatively undervalued when you look to the sector in general.

In my opinion Starbucks (SBUX), Caribou Coffee Company, Inc. (CBOU), Green Mountain Coffee Roasters Inc. (GMCR), Peet's Coffee & Tea, Inc. (PEET) are all overvalued when you look to some fundamentals like P/E, P/B etc. An opportunity for the coming years that fundamentally is still undervalued could be the microcap: Coffee Holding Co. (JVA).

Coffee Holding Co. conducts wholesale coffee operations, including manufacturing, roasting, packaging, marketing and distributing roasted and blended coffees for private labeled accounts and its own brands, and it sells green coffee. The company’s sales are primarily to customers that are located throughout the United States with limited sales in Canada. Such customers include supermarkets, wholesalers, gourmet roasters and individually-owned and multi-unit retailers. The company closed its manufacturing operations at its Brooklyn, New York location in May 2009. The majority of the company’s coffee processing capacity has been moved to its La Junta, Colorado facility and its facility in Brecksville, Ohio from New York in October 2009.

Some major strengths

Positioned to Profitably Grow Through Varying Cycles of the Coffee Market
One of the few coffee companies that offer a broad array of branded and private label roasted ground coffees and wholesale green coffee across the spectrum of consumer tastes, preferences and price points. While many of their competitors engage in distinct segments of the coffee business, the company sells products in each of the following areas:

Retail branded coffee;
Mainstream retail private label coffee;
Specialty retail coffees both private label and branded;
Wholesale specialty green and gourmet whole bean coffees;
Food service;
Instant coffees; and
Niche products.

Their branded and private label roasted ground coffees are sold at competitive and value price levels while some of their other branded and specialty coffees are sold predominantly at premium price levels. Because of this diversification, the company’s profitability is not dependent on any one area of the coffee industry and, therefore, is less sensitive than their competition to potential coffee commodity price and overall economic volatility.

Wholesale Green Coffee Market Presence
As a large roaster-dealer of green coffee, JVA is favorably positioned to increase its specialty coffee sales. Since 1998, the company has increased the number of its wholesale green coffee customers, including coffee houses, single store operators, mall coffee stores and mail order sellers, by 88% from 150 to 282. In addition, although JVA hasn't any formalized, material agreements or long-term contracts with Green Mountain Coffee Roasters, it has a 17-year relationship with GMCR, its largest wholesale green coffee customer.

Management Has Extensive Experience in the Coffee Industry
The company was founded and incorporated in New York State in 1971 and has been a family operated business for almost 40 years. Throughout this time, it has remained profitable through varying cycles in the coffee industry and the economy. Andrew Gordon, the President, Chief Executive Officer and Chief Financial Officer, and David Gordon, the Executive Vice President – Operations, have worked with Coffee Holding for 27 and 29 years, respectively. David Gordon is an original member of the Specialty Coffee Association of America.

Growth Strategy
The company believes that significant growth opportunities exist by selectively pursuing strategic acquisitions and alliances, targeting the rapidly growing Hispanic market in the United States, increasing penetration with existing customers by adding new products, and developing their food service business.

Recent news and results
On June 25, the company announced that its Board of Directors has approved a regular quarterly dividend program of $0.03 per share to shareholders. This dividend will be paid on July 29, 2010 to shareholders of record on July 16, 2010. 'A regular quarterly dividend program accomplishes our goals of creating shareholder value while sending a signal to the marketplace as to the company's current strength,' said Andrew Gordon, President & CEO.

We want to reward our investors with this modest income to give them further reason to back our company for the long haul at a time when many investors are looking for both value and stability in what has become an increasingly difficult and unstable economic and investing environment. This payout, with its current 2.4 % yield, will not prevent us from our achieving our other corporate growth initiatives, as we continue to generate free cash flow.

On June 11, the company announced its operating results for the three and six months ended April 30, 2010. In this release, the Company:

Reports that net income increased $399,798, or 99.8%, to $800,448, or $0.15 per share (basic and diluted), for the three months ended April 30, 2010 compared to net income of $400,650, or $0.07 per share (basic and diluted), for the three months ended April 30, 2009;
Reports net sales of $41,276,459 for the six months ended April 30, 2010 and $19,917,308 for the three months ended April 30, 2010; and
Reports sales growth of 11.4% for the three months ended April 30, 2010 compared to the three months ended April 30, 2009.

The increase in net income primarily reflects increased net sales, which resulted in an increase in gross profit and an improvement in gross margins.The increase in net sales reflects increased sales of both green coffee and private label coffee to their largest customers.

Subsequent to the end of the reporting period, on May 17, 2010 the company completed the purchase of substantially all of the assets, including fixed assets, inventory, trademarks, customer list and supply-chain relationships of Organic Products Trading Company (OPTCO), a Washington corporation. OPTCO works directly with coffee farmers in South America and Central America to develop and import high quality certified organic green specialty coffee which is sold directly to small and medium-sized roasters throughout the United States and Canada. Its core business is highly complementary to the existing current business strategy of Coffee Holding. Both companies mutual customer bases will now be merged into one enhancing an already solid position as one of the largest purveyors of specialty green coffee in the U.S. today.

We are both pleased and excited to report our latest quarterly results showing almost a twofold increase in net income and an 11 % growth in revenues. Our recent strategy of focusing on higher margin business while continuing to expand our customer base has proven to be successful as indicated by our recent results, said Andrew Gordon, President and Chief Executive Officer of the Company.

This has been an interesting few months for us with the completion of the OPTCO transaction along with the changes we have implemented in our existing business model. We expect to continue to see continued growth as we walk that delicate line between expanding our profit margins while increasing our sales at the same time. The now completed addition of OPTCO and their customer base should assist in this as their high end Organic, Fair Trade gourmet Arabica offerings should increase both our revenue base and average gross margins on green coffee sales.

Despite the liquidity in the stock is low Coffee Holding could be an interesting investment in the long run. The chance of a take-over by a bigger competitor is a realistic scenario. Green Mountain Coffee Roasters (GMCR)would be a possible candidate. Also the booming market of organic green coffee puts the company in the spotlight. The valuation is low (P/E 7,11) compared to stocks as Starbucks, Caribou Coffee Company, Inc., Green Mountain Coffee Roasters Inc., which are traded at P/E-ratios of at least 20.

The experience of the management in the coffee markets is a great plus and gives confidence that the company can benefit in the cycles and trends of the coffee and convenience goods markets.

Some highlights:

Price & Volume

Recent Price 5.04
52 week high 5.60
52 week low 2.80
Beta 2.70

EPS Incl Extra (TTM) 0.71
P/E Incl Extra (TTM) 7.11
EPS Growth 3 Yr 69.21
EPS Growth 5 Yr 22.58

Revenue / Share (TTM) 14.52
Revenue / Share growth 5 Yr 14.32

Gross Margin (TTM) 14.15
Operating Margin (TTM) 8.39
Net Profit Margin Percent (TTM) 4.92
Return on Avg Equity (TTM) 36.53
Return on Avg Assets (TTM) 21.31

Market Capitalization (Mil) 27.67
Shares Out Current (Mil) 5.49
Float (Mil) 2.54

Financial Strength
Quick Ratio (MRQ) 2.32
Current Ratio (MRQ) 3.44
Total Debt / Equity (MRQ) 0.00

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