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Coffee Holdings: Coffee Play with Wild Price Swing in 6 Months

October 02, 2011 | About:
Coffee Holdings (JVA) has experienced a wide swing in only half a year. I have smacked my head for selling out too soon at $6 in April, making more than 50% in around three months, only to see the share price skyrocket to $30 in July. But from July until now, as the general market trend, its price has dropped substantially to only $7.50.

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JVA is quite conservatively financed; it has no short and long-term debt, and the main item in the liabilities is account payable and accrued expenses. That pushes D/A to around 56%. The big asset items are account receivables and inventories; each is around 37% of total assets.

Recently, it announced that it would sell up to 890,000 units. Each includes one share common stock and three-tenths of a warrant to purchase one share for $10.4 per unit. Net proceeds, which were expected to be around $8.3 million, will be used for working capital and general corporate purposes, including acquisition of businesses, technologies, companies, products, etc. In addition, the company, which belongs to Andrew Gordon (president, CEO, CFO and treasurer) and David Gordon, will sell up to 200,000 shares of common stock at the price of $9.92 a share. Its existing shareholders will be diluted as the pie is being cut smaller, from 5.5 million shares to 6.4 million shares. That might further drive down the stock price of the company.

What is interesting to note is its product, green coffee, is focused on premium coffee such as gourmet coffee, including AA Arabica coffee. Those would be sold at a substantial premium over traditional retail canned coffee, so the company thought its profitability would not be dependent on any one area of the coffee industry, and less sensitive than competition to potential coffee commodity price and overall economic volatility.

The company is considered the roaster-dealer of green coffee. The number of its customers for this segment has increased from 150 to 280 since 1998. It has an 18-year relationship with Green Mountain Coffee Roasters (GMCR), and this is the largest wholesale green coffee customer of JVA. Sales to GMCR have been in the range of 32-45% of total JVA’s net sales. And as 80% of GMCR’s sales derive from Keurig one-cup coffee system, there is both the product and customer concentration for JVA. So, if GMCR does well, then there is high probability that JVA would do well.

Furthermore, companies like JVA are subject to price swing in coffee prices. It’s in the commodity business, so the hedge on the fluctuation in the price conducted by the management of the company is one of the key factors for business success as well. JVA play is actually somehow a speculative play, on coffee commodities and the ability of the management to hedge safely.

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


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