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Why the Coffee Boom May Offer Huge Gains in a Volatile Market (NSRGY, KDP, GTEH, SBUX) 

Name five things you can’t live without.

For most of us, coffee is somewhere on the list along with the Internet, after air, water, and food. But, of these five basic necessities, only one of them is a growth industry right now.. coffee. Air is free, water and the Internet are fixed utilities. And food is too wide a category to say, but is mostly a non-growth market from an investment perspective.

Coffee, on the other hand, is surprisingly growthy. It has caught on with the millennials and zoomers and has evolved into a number of specialty areas, including high-end, infused, capsule, subscription, and others. The industry is expanding in breadth, scope, and format. 

It also has the advantage of being extremely recession resistant precisely because it’s on the list imagined above. In other words, it’s that rarest of investment themes: both growthy and non-cyclical – a opportunity for all seasons.

With that in mind, here’s a quick research expedition into the space to present our sense of where investment flows may best flourish: NESTLE S A/S ADR (OTCMKTS:NSRGY), Keurig Dr Pepper Inc (NYSE:KDP), Gentech Holdings Inc (OTCMKTS:GTEH), and Starbucks Corporation (NASDAQ:SBUX).

 

NESTLE S A/S ADR (OTCMKTS:NSRGY) is an obvious core member of this list. The company is a diversified leader, with its coffee business cooking largely due to the growth of the single-cup nespresso business.

The company pulled in sales of $47.1B in its last reported quarterly financials, representing top line growth of 0.7%. In addition, the company is battling some balance sheet hurdles, with cash levels struggling to keep up with current liabilities ($10.3B against $41.6B, respectively). But the trend is up and away, and the stock reflects precisely that idea of recession-proof growth.

NESTLE S A/S ADR (OTCMKTS:NSRGY) trumpets itself as a company that operates in the food and beverage marketplace. 

The company operates through Zone Europe, Middle East and North Africa; Zone Americas; Zone Asia, Oceania and sub-Saharan Africa; and Nestlé Waters segments. It offers baby foods under the Cerelac, Gerber, and NaturNes brands; bottled water under the Nestlé Pure Life, Perrier, Poland Spring, and S.Pellegrino brands; cereals under the Fitness, Nesquik, cheerios, and Lion Cereals brands; and chocolate and confectionery products under the KitKat, Nestle L’atelier, Nestle Toll House, Milkybar, Smarties, Quality Street, Aero, Garoto, Orion, and Cailler brands. 

The company also provides coffee products under the Nescafé original, Nespresso, Nescafé Dolce Gusto, Nescafé, Nescafé Original 3 in 1, Coffee-Mate, Nescafé Gold, and Nescafé Cappuccino brands; culinary, chilled, and frozen foods under the Maggi, Hot Pockets, Stouffer’s, Thomy, Jacks, TombStone, Buitoni, DiGiorno, and Lean Cuisine brands; dairy products under the Carnation, Nido, Coffee-Mate, and La Laitière brands; and drinks under the Nesquik, Nestea, and Milo brands. 

In addition, it offers food service products under the Milo, Nescafé, Maggi, Chef, Nestea, Stouffer’s, Chef-Mate, Sjora, Minor’s, and Lean Cuisine brand names; healthcare nutrition products under the Boost, Peptamen, Resource, and Nutren Junior brands; ice cream products under the Dreyer’s, Mövenpick, Häagen-Dazs, Nestlé Ice Cream, and Extrême brands; and pet care products under the Purina, ONE, Alpo, Felix, Pro Plan, Cat Chow, Fancy Feast, Chef Michael’s, Bakers, Friskies, Dog Chow, Beneful, and Gourmet brands. Further, it provides Starbucks Creamers.

 

Keurig Dr Pepper Inc (NYSE:KDP) pulled in sales of $2.9B in its last reported quarterly financials, representing top line growth of 4.3%. In addition, the company is battling some balance sheet hurdles, with cash levels struggling to keep up with current liabilities ($101M against $6.5B, respectively).

But, over any investment time horizon, the stock has performed admirably given its strong positioning in the space and the strategic construction of an ad-hoc diversification that has been produced through recent years by solid deal-making courtesy of a first-rate board.

Keurig Dr Pepper Inc (NYSE:KDP) bills itself as a beverage company in the United States and internationally. It operates through four segments: Coffee Systems, Packaged Beverages, Beverage Concentrates, and Latin America Beverages. 

The Coffee Systems segment provides single-serve brewing systems and specialty coffee to home, offices, restaurants, cafeterias, convenience stores, and hotels, as well as produces and sells range of other specialty beverages in K-Cup pods, such as hot and iced teas, hot cocoa, and other beverages. This segment also develops and sells brewer accessories, and other coffee-related equipment; and provides beans and ground coffee in bags, fractional packages, and cans. 

The Packaged Beverages segment manufactures and distributes packaged beverages for own brands, as well as for allied brands; and various private label beverages. The Beverage Concentrates segment manufactures and sells beverage concentrates. This segment also manufactures beverage concentrates into syrup. 

The Latin America Beverages segment offers carbonated mineral water, flavored carbonated soft drinks (CSD), bottled water, and vegetable juice. 

The company offers its CSD and non-carbonated beverages products under the Dr Pepper, Canada Dry, Crush, Schweppes, Sunkist soda, 7UP, A&W, Sun Drop, Squirt, RC Cola, Hawaiian Punch, Mott’s, Clamato, Bai, Yoo-Hoo, Core, ReaLemon, Mistic, Vita Coco coconut water, Big Red, Vernors, Peñafiel, Aguafiel, Mr and Mrs T mixers, evian, Forto Coffee, A Shoc brands. It distributes its products through retail channels, including supermarkets, fountains, mass merchandisers, club stores, vending machines, convenience stores, gas stations, small groceries, drug chains, and dollar stores. 

KDP has had a rough past week of trading action, with shares sinking something like -3% in that time. That said, chart support is nearby and we may be in the process of constructing a nice setup for some movement back the other way.

As with Nestle, the driver here at the margin is the k-cup single-serve coffee business. We wouldn’t expect that to change over the near term.

 

GenTech Holdings, Inc. (OTCMKTS:GTEH) is a more speculative name on this list, but a worthwhile one for those in search of potentially dramatic upside potential. The key here is that the stock is cheap as dirt and just crossed over the threshold from development stage to commercial stage operations. 

We really like this micro-cap because the company has put in place a first-class product offering in the subscription coffee space by coordinating top-shelf suppliers and partners to produce a high-end offering that includes various package options, including capsules, CBD-infusion, and premium flavors at a competitive price. And yet the stock is trading as if this was a hopelessly lost pipedream story. Far from it, the company just announced the official launch of its “Secret Javas” premium coffee subscription package product this morning. 

“We are extremely pleased to announce that our flagship product offering is launching on schedule today with all key pieces in place and a capacity to service any conceivable scale of demand promptly and with a truly market-leading product,” commented David Lovatt, CEO of GenTech. “We marshalled key resources, including suppliers, distributors, and a critical piece of the puzzle as a provisioning partner, and we can now report that we are ready to take orders and ship a product we are very proud to associate with our most ambitious branding ideals. I’m extremely proud of our team and very grateful to everyone involved for their hard work and determination in successfully delivering on this critical milestone.”

GenTech Holdings, Inc. (OTCMKTS:GTEH) will pay a minor monthly fee to a Contract Partner, who will also keep 8% of total sales and several pennies per package shipped. And it will thereby completely dispense with balance sheet risk and upfront financial burden and still be able to handle a theoretically infinite level of demand should it arise following this launch.

More to the point, the company is now going to start to book sales and move to the next phase in its evolution. 

In addition, GTEH promulgates itself as a company that operates a chain of hemp centric coffee shop retail spaces under the Healthy Leaf brand name. The company offers CBD-infused chocolates, skin creams, artisan teas, artisan coffee, wellness snack bars, and pet treats through its retail spaces.

However, more importantly, the company is also in the midst of launching its very promising premium specialty coffee subscription package product, as noted.

The big picture was framed nicely by a note from the company’s management this morning: “We firmly believe we have one of the highest quality product offerings in the subscription coffee space as of today. And we managed to coordinate a launch scenario almost completely devoid of balance sheet risk or frontloaded financial strain thanks to well-negotiated independent agreements with our suppliers and our provisioning partner. As cash flow picks up from new orders, we will be able to expand our marketing investment and gradually invest in the in-house capacity to handle all customer order flow. This will become increasingly important given the dramatic tailwind we see driving the subscription specialty food and beverage marketplace over the near and intermediate-term.”

 

Starbucks Corporation (NASDAQ:SBUX) is another obvious addition to this list. The stock has been a huge performer over the past 18 months, ripping from about $50/share to test the $100/share level last summer for roughly 100% gains in about twelve months – a rare feat for a large cap of this size. We are witnessing a consolidation now, with the stock down about 20-25% from its highs. But the trends that have driven the growth remain in place, and the company’s size, dominance, and geographic diversification offer a compelling recipe for those interested in exposure to the coffee boom in large-cap form.

The stock has been facing a pretty dominant offer as the coronavirus scare gets into full gear, which hasn’t been the type of action SBUX shareholders really want to see. In total, over the past five days, shares of the stock have dropped by roughly -3% on above average trading volume. All in all, not a particularly friendly tape, but one that may ultimately present some new opportunities. SBUX shares have been relatively flat over the past month of action, with very little net movement during that period.

Starbucks Corporation (NASDAQ:SBUX) frames itself as a company that operates as a roaster, marketer, and retailer of specialty coffee worldwide. 

The company operates in three segments: Americas; International; and Channel Development. Its stores offer coffee and tea beverages, roasted whole bean and ground coffees, single-serve and ready-to-drink beverages, and iced tea; and various food products, such as pastries, breakfast sandwiches, and lunch items. 

The company also licenses its trademarks through licensed stores, and grocery and foodservice accounts. It offers its products under the Starbucks, Teavana, Seattle’s Best Coffee, Evolution Fresh, Ethos, Starbucks Reserve, and Princi brand names. As of October 30, 2019, the company operated approximately 31,000 stores.

Starbucks Corporation (NASDAQ:SBUX) generated sales of $7.1B, according to information released in the company’s most recent quarterly financial report. That adds up to a sequential quarter-over-quarter growth rate of 5.2% on the top line. In addition, the company is battling some balance sheet hurdles, with cash levels struggling to keep up with current liabilities ($3.1B against $8.7B, respectively).

Published by Alan Masterson

Alan has over 25 years of trading experience in the U.S. equity markets. He began his career in finance working on a program trading desk specializing in over-the-counter stocks. His career progressed from that point to his current position as senior trader on an institutional trading desk. In the evenings, Alan teaches economics at a local community college. He has contributed articles to various publications over the last six years, including feature articles for an economics magazine and various financial blogs. You may contact Alan via his email ([email protected]) or his Google+ page (https://plus.google.com/103338576216002376250).

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