There are few business models better than selling a substance that is addictive, (largely) harmless, and legal. That is certainly true of coffee, even if investors haven’t appreciated the stocks this year.
“Coffee is a good category. Simple. People drink coffee,” writes Wells Fargo analyst Chris Carey. “They drink at home…They drink it away-from-home.”
However, that message sometimes gets masked by the debate about at home or away from home coffee consumption, he notes, one that took on new meaning during the Covid-19 pandemic, which forced everyone to be their own barista—at least for a while.
That tug of war has often pitted companies such as
Keurig Dr Pepper
(ticker: KDP) against
Starbucks
(SBUX)—both of which have underperformed the broader market year to date. But Carey argues it doesn’t necessarily have to be an either/or proposition. His deep dive into coffee data shows there is good news for both categories.
Single-serve coffee—Keurig’s specialty, given its pod business—is down from its pandemic peak, but has seen consumption grow per capita over the past five years globally. In the U.S. its market share has expanded from 35.8% to 36.4%. And it isn’t just because of higher prices: Carey calculates single-serve pod prices are only up low-double digits over the past four years, while volumes are up in the high teens.
All of this means at-home coffee consumption is still 12% higher than prepandemic levels, Carey notes, largely thanks to the single-serve category, even as many consumers have resumed commuting and spending time at cafes.
Indeed, at-home coffee drinking’s gain hasn’t led to cafe pain, to judge by Starbucks, the juggernaut in the industry. Today, Starbucks’ U.S. business is nearly a third larger than it was prepandemic, helped by various factors, from a return to in-person school, work, and socializing, as well as the fact that coffee is an affordable indulgence.
Carey argues consumers are likely to continue to favor buying rather than making coffee, “with post-pandemic normalization featuring stepped-up growth as consumers spend on experiences and other non-durable goods.”
The upshot is Americans, apparently, are just more caffeinated—and investors don’t have to choose how to play the trend.
Carey has an Overweight rating and $40 price target on Keurig Dr Pepper (a Barron’s pick), arguing investors should buy into recent weakness, as its low valuation and intact long-term drivers look to be in place.
In addition, his colleague Zachary Fadem has an Overweight rating and $125 price target on Starbucks, another Barron’s favorite, as it, too, looks poised to capitalize on coffee’s global growth and a long-awaited recovery in China.
Once investors embrace the bull case, both stocks should perk up.
Write to Teresa Rivas at teresa.rivas@barrons.com
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