Let Peet's Coffee Percolate

Peet's Coffee & Tea, Inc. (PEET - Analyst Report) is a growth company in the premium coffee and tea industry. Management is implementing a growth strategy based on product quality and expansion through multiple channels of distribution.

The company has exhibited consistent revenue growth since 2002; hence, the stock trades at a premium P/E. However, after reporting in-line EPS for the first quarter of 2008, management now expects EPS to be at the lower end of the prior guidance range. The Hold rating is retained.

The specialty coffee market is highly competitive and fragmented. Many of its competitors have greater financial, marketing and operating resources than Peet's Coffee & Tea. Coffee prices have increased significantly since 2005 and with the growth of the specialty coffee industry, the company could experience significantly increased costs.

A significant percentage of the company's revenue is generated in California. A regional housing crisis and recession, a decrease in consumer spending, or a change in the competitive conditions in California could materially decrease the company's revenue and affect its growth strategy.

Peet's Coffee & Tea is currently selling at 35.6 times trailing 12-month EPS, reflecting the company's higher-than-average revenue growth profile. Revenues have grown at a 20.2% five year compound annual growth rate (CAGR).

Over the last few years, the stock has traded in a P/E range of 30 to 54, though most price action has been contained within the 36 to 47 P/E range. The company's pristine balance sheet, store expansion plans, and continued top and bottom line growth should support the stock's high P/E. The target price is $25.25, which is a 39 P/E multiple on 12 month trailing earnings.

Read the full analyst report on PEET