PEET/GMCR – CRAZY TURNED RIDICULOUS

GMCR just made life miserable for PEET.    

 

After a competiting bid from Green Maintain Coffee (GMCR), Peet’s Coffee & Tea (PEET) was forced to raise its offer to buy Diedrich Coffee by 24% to approximately $265 million.  Peet’s increased its bid to $32 a share from $26. 

 

Green Mountain is offering $30 a share in cash.  Green Mountain has been consolidating its K-Cup licenses as it bought Tully’s Coffee in March and announced the acquisition of Timothy’s Coffees earlier this month.

 

In some respects, PEET management’s talking up the DDRX deal exposed a weakness in PEET’s long-term business model, although the company will be fine without it.  To justify the egregious purchase price (94% or $249 million is goodwill), management needed to signal how important the single-serve coffee market is.  When discussing the just announced DDRX deal on a conference call, senior management commented that “you've got to take a look at this single cup household penetration growth and what's happening, it's a very fast growing segment. It's here to stay and it's going to be a significant consumer segment and this isn't going to take five years.   This is happening now.”

 

There is no denying that the recent growth in the single-serve segment is astonishing.  Green Mountain’s Keurig brand holds 85% share of single cup brewer sales, with sales doubling over the last two years.  In 2010, Keurig brewers will approach penetrating over 4 million homes.  With approximately 90 million households with coffee brewers, Keurig’s share remains less than 5%, but it is growing rapidly. The increasing share base of installed Keurig brewers is the primary driver of K-Cup growth.  And, Peet’s management has now communicated the need to play in this game!

 

The acquisition of Tully’s last March gave GMCR a brand with manufacturing capabilities in the western part of the United States – PEET’s core market.  Without the ability to compete in the single-serve segment, PEET is facing the potential for significantly slower top-line sales trends as its market share erodes over time.

 

PEET now sits out there exposed; damned if they do, damned if they don’t.  If they do buy DDRX, the fact that the valuation of DDRX is so over the top is a big negative for PEET and we will not know if the acquisition has proven successful until 2011 (when it is expected to be accretive).  On the other hand, if they don’t buy it now, how is management going to explain away the urgent need to get into the single-serve segment. 

 

Clearly, the growth in the home brewer single-serve segment has benefitted from more people being unemployed and staying at home for their morning coffee.  That being said, it is not surprising that MCD and other QSR operators are talking about how challenging the breakfast day part is.  For PEET, as I said before, the DDRX acquisition is not expected to be accretive until fiscal 2011.  What is the likelihood the economy recovers and the U.S. economy starts producing jobs again in 2010?  If you think it is likely, then the timing of this purchase at such a high premium is all wrong.  As more people go back to work, more and more Keurig brewers will be sitting unused at home and K-cup sales will slow right when PEET needs them most!


Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more