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TheStreet Open House

Coffee Stocks May Lose Some Steam This Week

NEW YORK (TheStreet) -- Coffee stocks are up as coffee prices are down. But earnings could change all that.

Dunkin' Brands (DNKN) and Starbucks (SBUX) report results Thursday. They've been flying high all year, in part due to declining coffee prices. While both companies have impressive growth strategies, the shares are trading at lofty values. That means earnings will haver to impress investors for them to rise higher.

So far this earnings season, a number of stocks that had solid earnings results traded down on the day of the report -- JPMorgan (JPM) and American Express (AXP) come to mind. Management teams have been conservative on earnings guidance. If those two companies follow suit and don't raise guidance, especially given wider margins (less of a benefit to Dunkin's franchise model; see discussion below), there could be a pullback in the shares.

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The one thing coffee stocks have going for them is a reduction in coffee bean prices, which some believe hasn't fully been reflected in analysts' estimates. Prices on the "C" market for Arabica coffee has moved significantly below $2 on economic concerns and a strong 2012 Brazilian crop. Coffee "C" prices are down 37% from last year at this time, and down 19% from the start of the year.

According to Andy Barish, an equity analyst at Jefferies (JEF), the cost of coffee for specialty coffee companies represents about 20% of sales. That should benefit the cost of goods sold, but not until 2013. Most coffee companies lock in coffee prices ahead of time -- Starbucks had prices through March 2013 locked in at the end of January. While earnings guidance for 2013 isn't expected to be provided tomorrow, commentary on bean prices probably will be.

Starbucks' stock has pulled back -- it's down 6% since reaching an all-time high April 13. Expectations are for the company to report second-quarter earnings per share of $0.39, an increase of about 15% from a year earlier. Brian Sozzi, chief equities analyst at NBG Productions, says when it comes to buying the stock ahead of earnings on weakness, he would approach with caution. "The Street is very bullish with their FY12 earnings estimates (already set above management's guidance) ... I just could envision a 'sell the news' event if Starbucks beats."

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