Peet's Measured Success: Under the Radar

BOSTON (TheStreet) -- A Hollander with experience in the bean trade, Alfred Peet moved to the U.S. after World War II and catalyzed a gourmet coffee movement. In 1966, he opened a coffee shop at the intersection of Walnut and Vine streets in Berkeley, California.

Since its inception, measured expansion and premium brews have helped Peet's Coffee & Tea(PEET Quote) fertilize earnings growth. In later years, partnerships with Whole Foods(WFMI Quote) and gourmet stores aided revenue expansion without compromising quality. Starbucks(SBUX Quote), on the other hand, has retreated and closed hundreds of stores, introduced breakfast sandwiches and rolled out a line of instant coffee.

In the second quarter, Peet's net income increased 12% to $3.4 million and earnings per share climbed 24% to 26 cents, boosted by a lower share count. Revenue grew 5% to $74 million. The company's gross margin widened from 20% to 21%, and its operating margin ascended from 6% to 7%, helped by lower expenses as a percentage of revenue.

Peet's has an admirable financial position, with no debt and ample liquidity, evident in its $21 million of cash reserves and its quick ratio of 1.3. We give the company a financial-strength score of 7 out of 10, equal to the "buy"-list average.

Ostensibly, Peet's is an expensive stock. Its trailing price-to-earnings ratio of 31 represents a hefty premium to the market and restaurant peers. But the shares are 45% cheaper than restaurant peers when comparing projected earnings and 50% cheaper when considering book value.