$3 million stock buyback in progress, will retire over 10% of its shares.
New product lines such as Teton Sea and single cup servings will jolt the top line.
Insider purchases are encouraging.
A prime acquisition target.
The coffee producer brewed up $125 million in sales the past twelve months, composed of 70% wholesale green beans, 15% private label and 15% branded. It has started up two new divisions, Teton Tea and its single cup serving line joint venture (Generations Coffee Company). It has 80,000 sq feet of roasting and packaging facilities between its Ohio and Colorado locations. Its corporate headquarters reside in Staten Island, New York. Its sales per employee amount to an impressive $2.1 million, dwarfing Smucker's (NYSE:SJM) $1.1 million per employee tally.
The coffee purveyor roasts, blends and packages for over 30 private label customers. It also has five of its own proprietary brands featuring Cafe Caribe, Fifth Avenue, Cafe Supremo, ViaRoma and Don Manual. In addition, it retains a licensing agreement with Del Monte, allowing it the right to sell Del Monte's S&W and Classico brands.
I have had more than my share of activist experience within the coffee sector, starting with Chock full of Nuts (before the internet), Eight o'clock Coffee and Farmer Brothers (NASDAQ:FARM). Chock Full of Nuts was acquired by Sara Lee, while FARM rose six fold in the past 4 years (I was active in promoting it). Unfortunately, I wasn't involved in the literal outer-space launch, of Diedrich Coffee (DDRX). That coffee company rose 3000%, in less than a year. It was ultimately acquired by Kuerig Green Mountain (NASDAQ:GMCR), for $290 million in December of 2009. The interesting point about the Diedrich story, is that JVA's current outside investor relations firm, the "Liolios Group" also represented Diedrich, during their unprecedented rise.
The metrics show bargain status, aided by the reality, the shares now migrate near five-year lows. The stock trades at just .21 of sales, and 1.10 of book value. Debt exceeds cash, by a mere $900,000, making the balance sheet squeaky clean. It is almost inconceivable to realize that this equity hit the $27 mark, just four short years ago.
The only research coverage the company has attracted, was the Maxim Group, who had a $7 target price in place. Unfortunately, the covering analyst left the company, so coverage was dropped. The good news is a slew of new blood started to take interest. Firms such as Key Equity Investors, Raymond James and Nueberger Berman all participated in the company's third quarter conference call. Its latest investor presentation is worth perusing, as well as fellow Seeking Alpha contributor, Dutch Trader's take on it.
The insiders have plenty of skin in the game. It is a family business that the brothers, CEO Andy Gordon, and COO David Gordon learned from their father Sterling, who founded it. The Gordons have a forty-year legacy intact. They currently hold a 10% ownership stake and recently purchased 30,000 shares between them in the open market. They must theorize the stock is undervalued or they would not have allowed the Board to authorize a $3 million stock buyback plan that could retire as much as 10% of its shares outstanding, at current prices.
Some major consolidation in the sector is occurring. Last week, when Kuerig Green Mountain agreed to be taken over by Joh H Benckiser at a 75% premium, the entire coffee space rose in sympathy. JVA had its largest volume day of the year, jettisoning nearly 20%, before retracing most of those gains later in the session (GMCR is JVA's largest single customer).
There is even one blogger that claims JVA's Chinese partner DTS8 Coffee (DTS8 pays a licensing fee to JVA to sell its Don Manual Brand) is attempting to acquire it. I think that logic, is a bit of a reach, but anything is possible. A more logical suitor would be Farmer Brothers, as its new facility/headquarters site in Fort Worth, Texas, will have extra capacity that could easily absorb JVA's operations - the synergy would definitely be there. In addition, don't count out Joh H Benckiser - besides acquiring GMCR, they have also purchased both Peet's and Caribou Coffee. There is no doubt, they have a voracious appetite for coffee companies and a war chest of cash to make it happen.
What's next? JVA's fourth quarter report is due out next month. I communicated with the CEO, via email last week, on his current assessment and he came back with the following bullet points: (1) new private label business has been captured, (2) increased distribution of its Cafe Caribe brand in Texas and hopes to infiltrate Florida is on the horizon, (3) improving gross profit margins, and (4) no more speculative coffee commodity trading will be enacted - only hedging activities to protect inventories. This should allow a clearer, cleaner interpretation of earnings. He also did not shy away on commenting on possible acquisitions during the conference call, stating they remain opportunistic and will target companies that can be easily incorporated into their platform and be earnings accretive.
Bottom line: If management is able to turn things around, the shares will indeed go vertical - a doubling, or even tripling will not be out of the question. If not, the shares will continue to languish. Management simply needs to trim costs to the bone (last quarter their SG&A costs actually went the wrong way, rising 6% to $1.9 million) while conversely, raising their top line. "Easier said, than done," but more normalized coffee prices, along with a razor focused approach, should definitely help.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
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