Peet’s Coffee & Tea

Why Starbucks should buy Peet's

February 23, 2011: 2:37 PM ET

Peet's is one of the best-positioned small-cap growth names in the restaurants and coffee space. It's an opportunity Starbucks shouldn't miss.

By Howard Penney, Hedgeye

Peet'sDevotees of Peet's Coffee and Tea may cringe to hear this, but Starbucks should take a good look at the chain's potential as an acquisition. The surge in coffee prices is an overhang, but not a deal-breaker to Peet's growth story. Any commodity concern-induced dips in the share price should be viewed as an entry point.

For some background on Peet's, its current fiscal year 2011 earnings per share guidance of $1.53 to $1.60 represents an effective doubling of the company's EPS from 2008. This estimate takes into effect the price increases already implemented in the retail and home delivery businesses at the start of the fourth quarter of 2010, in the foodservice business in January and in the grocery segment in early February. As of the company's third-quarter 2010 earnings call, management had decided not to take pricing in the grocery channel, but significantly higher coffee costs pushed the company to implement an 8-10% price increase.

Peet's expects total coffee costs will be up nearly 30% year-over-year. Sales are targeted to grow in the 8% to 10% range, driven by a mid single-digit rate growth in retail and a higher growth rate in specialty. More

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