Janney Montgomery Scott Initiates Coverage on Peet's Coffee and Tea (PEET) with a Buy; Diedrich Acquisition Complements Nicely

November 6, 2009 6:54 AM EST

Janney Montgomery Scott initiates coverage on Peet's Coffee and Tea (Nasdaq: PEET) with a Buy. Price target $62.

Janney analyst says, "With the pending acquisition of Diedrich Coffee (Nasdaq: DDRX), PEET now has access to the fast-growing single cup segment of the specialty coffee category and is participating in this trend with the market leader, Keurig. Prior to the acquisition, PEET had been increasing EPS at a 25%+ rate despite a slowdown in the core PEET retail stores, driven by a rapid 12.4x increase (20%+) in Peet's branded coffee sales in the grocery channel. The one hole in PEET's portfolio was the lack of participation in the rapidly growing single cup coffee trend, and this is now solved through the Diedrich acquisition. Prior to the acquisition, we forecast PEET has a three-year sales and EPS CAGR of 9% and 20%, respectively. With Diedrich, we forecast a three-year sales and EPS CAGR of 19% and 47%, respectively. At $37/sh, PEET is trading at 35.0x our 2009 EPS estimate of $1.06. While 2010 EPS will see the dilutive impact from the acquisition primarily in the form of non-cash goodwill amortization (~$0.50/sh), we expect EPS to more than double from the estimated 2009 level of $1.06 to $2.49 (ex-goodwill amortization) in 2011."

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