Chock Full O' Nuts May Soon Have Pulses Racingby
Over the past three years, shares of Chock Full O' Nuts have been sleepy, drifting mostly between 6 and 8. But some savvy investors are now determined to wake the stock up. They have started prodding the management of the nation's fourth-largest coffee producer to take more aggressive steps to accelerate the company's earnings growth.
"Chock Full O' Nuts has a tremendous franchise, but management hasn't fully exploited its values," complains asset investor Mark Boyar, who heads Boyar Asset Management and NRMB Management. These investor groups have accumulated a combined stake of over 5%, and they're still buying. Boyar recently met with Chock management to seek board representation.
"The company hasn't had any consistent earnings growth, and it's time to start chalking up 10%-to-15% gains in the next three to four years," says Boyar. Once Chock goes in that direction, "we believe the stock could double in two years," he adds. And if he's denied a board seat, "we may seek a third party to join us in a proxy fight."
With its shares at 7 1/4, Chock sells for about half of what its assets would command if they were put on the market, says Nancy Enslein, an analyst at Gabelli & Co., which has boosted its stake in Chock to 9% from 6% in June. "This big discount clearly represents a terrific buying opportunity," adds Enflein, who expects the stock to hit 20 in three to four years.
READY TO GO. Chock is the only big stand-alone play in the coffee business, she notes. Among the majors that dominate the market--with a combined share of 80%--are Philip Morris' General Foods subsidiary, Procter & Gamble's Folger Coffee, and Nestle. Indeed, since Chock has just 3.4% of the $6.5 billion U. S. retail coffee market, it should have a lot of growth ahead with new products such as a recently introduced line of ready-to-drink iced capuccinos. Initial market reaction to Chock O' Ccino "has far exceeded Chock's expectations," says Enslein.
She points out that iced coffee generates sales of $4 billion in Japan, and she believes that when the major U. S. coffee makers start marketing their own brands, sales should take off here as well. A Nestle/Coca-Cola joint venture will soon launch an iced-coffee product, and General Foods has test-marketed a similar one. In June, Chock acquired Hillside Coffee, a fast-growing California roaster of specialty coffees that enjoys a 20% operating margin on its 40 flavors, sold mostly in supermarkets. Enslein counts that as a big plus. She sees Chock posting earnings of 88~ a share for the year that ended on July 31, and $1.15 in 1992.