Michael Moe was one of the few analysts who had pegged Starbucks (SBUX ) as a buy in 2001, when it was just 14 a share. It has since rocketed to 54. Moe, now CEO of investment firmThinkEquity Partners, says he has found a new Starbucks in the making: Peet's Coffee & Tea (PEET ), originally the supplier of coffee beans to Starbucks. Peet's now sells its own roasted coffee at its 96 retail stores in six states, including California, Illinois, and Texas, which account for 70% of sales. It supplies beans to Wolfgang Puck restaurants, Omni Hotels, 3,500 grocery stores -- and online. Coffee fans love choices, and Peet's is yet another in the hot specialty coffee market, says Moe, "with its own group of loyal fans -- à la Starbucks." But Peet's is tiny next to Starbucks, which has a market cap of $21 billion and 9,000 stores with sales of $5.2 billion. Peet's market value is just $450 million, with sales of $145 million. And Peet's stock -- now 29, up from 23 in January -- sells at 36 times estimated 2005 earnings of 77 cents a share, vs. Starbucks' 45 times earnings. Based on its fast earnings and sales growth, Peet's stock could double in two years, says Moe. ThinkEquity analyst Nicole Miller says Peet's aims to be the gold standard in specialty coffee, based on its deep-roasting process of Arabica beans. Peet's expects to add 23 stores this year. Kristine Koerber of JMP Securities, which owns shares and has done banking for Peet's, sees 2006 earnings of 93 cents a share. Profits in 2004 were 64 cents a share.
Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.
By Gene G. Marcial