You might have noticed that coffee prices went down a lot lately: ICE Coffee “C” futures are traded commodity futures that serve as the benchmark for the world coffee markets (press here to download a brochure). The price of ICE Cofee "C" futures has dropped tremendously in the past years.From a top settlement price of $280 in we are now at levels of about $134.5, as seen in the graph below for the NASDAQ:
At the same time, the consumers did not benefit from this decline in the price of raw cofee beans: the prices of espressos, lattes and other cappuccinos was not precisely divided by 2 last year in your local coffee store.
Let us not check the Quarterly and Annual report of a major beneficent of this situation: Starbucks Coffee (NASDAQ:SBUX). Starbucks is a world’s leading firm solely dedicated to coffee. We checked first the latest quarterly report which was published last week, on April 25th. (click here to download the report from Starbucks web page). On page 2 of the report, you can find the following table:
So Starbucks sold more coffee and increased its markings on each coffee cup being sold. The result was a tremendous increase in the company’s reported earnings. An increase in Earnings of 26.0% compared with the same period one year ago was reported a little further down in the Quarterly report (page 7 for those who downloaded the report). This is a major jump in earnings in an otherwise fairly stable business sector. What about the share price? The Starbucks stock (NASDAQ:SBUX) has literally skyrocketed in the market in the past two years, with an increase in 80% since Jan 2011 compared to an increase of only 20% for the major US indices:
I am not taking a view on Starbucks management skills or ability to deliver growth but I am simply saying that the market has pushed the stock price a little too high at the moment. As soon as the price of the coffee beans raises again from the low where it has fallen now, the Starbucks stock will stop raising. The stock price might stagnate or it might go down as it will be tough for the Starbucks to deliver enough growth to offset a significant decline in the firm's operating margin.
What does that tell us about a sound investment decision? First at the moment do not invest in the Starbucks stock right now. The company is fantastic, they have great products and remain indisputably the World’s no 1 brand for coffee stores, but the current valuation is simply too high to make an entry. On the other hand the green coffee beans price is very low right now and it will come back up sooner or later, so a wise mid to long-term investment is to buy in some coffee ETFs or ETN that give a direct exposure to the price of the coffee beans as all those funds are doing is buying Coffee at the current market price:
- the Exchange traded fund JO: iPath DJ-UBS Coffee Subindex Total Return SM Index ETN (NYSEARCA:JO)
- its sister exchange traded note CAFE: iPath Pure Beta Coffee (CAFE)
So our pragmatical advice is to way with Starbucks and buy into CAFE or JO with an investment horizon of 2-3 years.
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