Monday, July 1, 2013

Invest in Coffee Now to Take Advantage Of Global Growth

According to a recent study done by the National Coffee Association, the number of coffee-drinking adults in the U.S. has grown to 83% this year. This percentage is up from a 2012 level of 78%. The same study also found that the amount of adults who drink coffee daily rose to 63% from the 58% level in 2011. With the U.S. leading the world as the largest coffee consumer, an investment today could see substantial returns as that number increases domestically and internationally.

Currently, the U.S. is the largest coffee consumer, but in per capita numbers it ranks 26th in the world at 4.2 kg of coffee consumed per person per year. The number-one consumer per capita is Finland, with 12.0 kg. That is nearly three times the U.S. This shows that there is still room for growth in the states. Also, notable countries with less per capita consumption are Russia with 1.7 kg,  Mexico 1.2 kg, and China and India with less than 0.4 kg. These highly populated countries could be crucial in the growth of coffee consumption.

Leading brands
 Anyone who drinks coffee regularly knows the brand name Green Mountain Coffee Roasters (NASDAQ: GMCR)This company busted on the scene a few years ago when it purchased Keurig, the single-cup coffee brewer. Green Mountain's main focus is on specialty and organic Arabica roasted coffee through three different brands.
Green Mountain has had substantial revenue growth over the past few years but has recently seen performance slow and level off mainly due to weakening demand for its brewers and portion packs. This caused concerns among many shareholders because they as well as the company thought the strong growth would continue well into the future. Although Green Mountain's revenue growth has slowed, it is still rising as can be seen below from the revenue growth comparison chart.

Future outlook
Green Mountain is anticipating between 11% and 14% net sales growth for the full-year 2013. If net sales continue to grow at this pace, investors will see above- average returns. One of the drivers of future growth will come from Green Mountain's international investments. The company recently announced through its Green Mountain Canada subsidiary that it will be investing CAD$55 million in its production facilities in Montreal over the next three years.
An added bonus came from the government of Quebec, which is contributing an additional CAD$5 million in non-repayable funds for the project. By the end of 2014, Green Mountain is anticipating between $300 and $400 million in free cash flow. This will help the stock with future growth as the company will have more cash on hand to invest.

Dunkin' Brands Group (NASDAQ: DNKN), mostly known for its franchise Dunkin' Donuts, is a world wide leader for its quick-service restaurants serving hot and cold coffee along with baked goods, breakfast sandwiches and hard-serve ice cream through its Baskin-Robbins brand. There are currently more than 10,400 Dunkin' Donuts and around 7,000 Baskin-Robbins. Dunkin' Brands also has a presence in retail-coffee sales with whole beans, ground coffee and single k-cup coffee.

Ability to adapt and survive in difficult times
One of the factors that impresses me about Dunkin' Brands is its business sense and resilience. The recession ended its streak of 45 consecutive quarters of store-sales growth with quarterly declines of -0.8% and -1.3% in 2009.
Since 2009, it has not had another negative quarter of comparable-store sales growth. Dunkin' Brands also impressed me a few years ago with its push in cold drinks. During hot summer months, hot coffee doesn't hold the same appeal. Dunkin' Brands was able to refocus its strategy during this time to keep customers coming in.

Future outlook
In 2012, Dunkin' Brands opened 291 new restaurants for a net growth rate of 4%. It is focused on continuing its expansion across the U.S. and intends to eventually double its U.S. footprint. That factor, along with increased sales from existing restaurants, will well position this stock to see above-average returns in the future.
Dunkin' Brands has only been public for a short period but gave investors returns of more than 35% for 2012. It has already increased its dividend from $0.15 per quarter to $0.19. Investors can expect this trend to continue as Dunkin' Brands increases its footprint in the U.S. and sees increased sales growth.

With Dunkin' Brands' new focus on driving franchise profitability, it announced 78 net new stores in the U.S. in the first quarter. This was the best the company has ever seen for this time period. With franchise sales and new store openings on the rise, Dunkin' Brands will continue to provide strong returns for shareholders.

It is nearly impossible to hold a discussion on coffee without mentioning this $49 billion market cap company. Starbucks (NASDAQ: SBUX) is a roaster and retailer of coffee with operations in over 60 countries. The company roasts and sells specialty coffee drinks as well as pastries and baked goods at retail locations.

Last year marked Starbucks' best year in its history with $13.3 billion in revenue. It ended the year with 12,903 stores including both company-operated and licensed stores. A total of 398 net new stores were opened in 2012. This represents a strong commitment for organic growth.
Starbucks reported that 75% of its revenue came from beverage sales and only 4% came from packaged coffee sales. That represents an area of opportunity for growth in the future.

Setting the stage for international brand loyalty
One of  the reasons Starbucks had favorable results in 2012 was from a 7% increase in global sales. Starbucks' focus on developing a presence globally will enable it to begin developing brand awareness and loyalty as it has in the U.S. Starbucks currently has a total of around 12,903 stores with 2,628 located in the China/Asia Pacific region.

One of the highlights for 2012 was 130 new stores opened in China. This strategy will enable investors to see around the same returns the stock has already given over the past 10 years at 18.7% with its new presence and focus in high- population areas throughout Asia. The current yield on its dividend is 1.2% on $0.21 per quarter; this is up from $0.10 in 2010. Investors can also anticipate dividend increases in the future, which will help with shareholder returns.

Best globally positioned company
An investment in either three of these stocks will give investors a cut in increasing global coffee consumption. Starbucks and Dunkin' Brands offer income and dividend investors more than a 1% head start each year with signs of more increases to come. Green Mountain has been the most volatile over the past few years.

If I had to pick just one I would throw my money at Starbucks because of its ability to build brand loyalty and its current strategy in Asia with a high concentration of new store openings. As Starbucks builds its brand in Asia, the stock will benefit greatly from this new revenue stream.


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