I've been looking at some small market-cap companies in the coffee industry for some time now and came across Ten Peaks Coffee and figured I'd enjoy some discussion about this stock.
Ten Peaks Coffee (TPK) is a Burbany-based decaffeinated coffee company. Their main sources of competitive advantage include their strong brand name (Swiss Water) and their strong customer loyalty and well-developed customer relationships.
Business Model:
Ten Peaks coffee makes money from three different methods: 1. They purchase arabica coffee, decaffeinate it with their chemical-free decaffeination method, and sell this coffee (non-toll revenue)
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They decaffeinate coffee provided by their customers and sell it back to them (toll revenue)
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They provide coffee warehousing operations for outbound coffee shipments through their subsidiary, Seaforth. This subsidiary was originally created to help manage their coffee revenue and it has since become a relatively small part of their revenue by providing these same services to their competitors.
Customer Profile:
about 50% of their revenue comes from the United States and a further 35% from Canada. That being said, their international expansion has drastically increased over the last couple years and they have inroads into Japanese markets and 25 other countries. Customers consist of large coffee chains (Tim Hortons, Starbucks, etc.), specialty coffee shops, and retail outlets
Management:
Their board of directors includes several people with extensive knowledge in the coffee industry. Frank Dennis, their CEO, managed the growth of Kraft's coffee division. Roland Velt, another board of director, is the owner of a large US green coffee trading house. Their board has decades of experience in finance and law.
Financials:
Ten Peaks is incredibly solvent. Most debt carried by Ten Peaks is related to their hedging activities. Current Debt/Equity ratio is 2.07. Growth is still fairly strong with Ten Peaks. They have expanded their production line in recent years. 6-year average revenue growth has been 20%. They have good liquidity. Their inventory turnover ratio is pretty strong at 83 days and their receivables turnover is 32 days. Finally, Ten Peaks is a bit profitable. Their net margin is currently negligible (2%) and their return on assets (2.9%) and equity (4%) is also not significant but this is characteristic of a growing company.
Macroeconomic Analysis:
Ten Peaks has experienced strong growth over the last couple years and this should continue due to a growing coffee industry. The Canadian and US economy both look pretty strong in the short-term and their profitability should be slightly weaker this year due to the strength of the Canadian Dollar.
Porter Five Forces:
Their rivalry is pretty high. Nestle controls 45% of the industry and a couple other companies (Jacobs Douwe Egberts and JM Smucker) are also huge players. That being said, Ten Peaks has carved their niche in decaffeinated coffee and I think it will create a moat for them to compete. Other competitors include Caribou Coffee and Jammin Java. Threat of substitutes: relatively weak. People aren't going to bail on their coffee for tea. Threat of new entrants: Medium. There is moderate possibility of new entrants because capital costs aren't extreme but slim industry margins will keep private equity at bay. Buyer Power: Low. Ten Peaks must take coffee costs without any negotiating power. One of the biggest impacts on their profitability is any change in the cost of coffee. Supplier Power: Low. Ten Peaks doesn't have the ability to pass on rising coffee prices to their customers.
Firm Analysis:
Ten Peaks are one of only a few certified decaffeinators in North America and have received the highest rank ever for a decaffeinator from The Coffee Review. They are able to achieve strong customer loyalty through loyalty programs and vendor education. They are respected by the customers by providing a chemical-free process, contributing to charities and fair trade, and by valuing the importance of providing a great taste of coffee.
That said, their weaknesses are their dependence on only a few customers (4 customers represent 40% of revenue) and they must carry a lot of inventory to smooth coffee costs.
Opportunities exist in their international expansion and leveraging their strong brand name with other partnerships. Recently, they partnered with Green Mountain to provide their coffee in coffee pods.
Threats include their exposure to the Vancouver market (where their only processing factory exists), changes to coffee prices, a decline to the decaffeinated coffee market, and a strong Canadian Dollar.
Valuation:
Their current revenue is about $85 million. Short term growth outlook is very promising as they poach sales from their competitor which recently lost an FDA fight. Two new production lines also become fully operational in mid-2018, a bullish outlook. Long-term growth will be tapered off by a potentially declining decaffeinated coffee market.
They have had uninterrupted dividends since 2004 and nearly uninterrupted revenue growth during this period. They are currently trading at $6/share which is almost the lowest they have been trading since 2015 and represents a 50% decline from their high 1.5 years ago. At this price, given their promising growth and consistent dividends, I think they are undervalued and possibly a good buying opportunity.
Other Key Stats:
They are currently trading at a $54M market cap, have a beta of -0.05, and a weak P/E of only 13.13. Given that this is half the P/E of Nestle, I think represents strong undervaluation and they could become a takeover target.
Thoughts?
Submitted August 06, 2017 at 03:14AM by nonameattachedforme http://ift.tt/2vBMxWI
