Investors sniffing around

TurboChef

( OVEN) might want to wake up and smell the coffee -- right now.

TurboChef, best known for selling the ovens that cook Subway's popular toasted sandwiches, soon could have

Starbucks

(SBUX) - Get Report

hooked on its high-speed ovens as well. Earlier this week, Starbucks began rolling out hot breakfast and lunch sandwiches at its 126 Chicago-area stores. Starbucks, which has been testing TurboChef's ovens for a couple of years, now sells hot sandwiches in five major markets.

"The customer response has been great," Brigid Benson, a regional manager for Starbucks, told

TheStreet.com

on Wednesday. "It's been very exciting."

To be clear, Benson never said that Starbucks -- a company that's fiercely protective of its strategies -- has installed TurboChef-brand ovens in its Chicago stores. Rather, she called such information "proprietary" and declined to elaborate further. However, a Starbucks manager on the West Coast confirmed that her store in fact uses TurboChef while echoing Benson's comments about strong customer response and saying that the hot sandwiches are definitely "here to stay."

Starbucks has also expressed a strong interest in using ovens that successfully contain aromas -- which TurboChef's unique design allows -- so that the scent of its flagship coffee products continue to fill the air.

Meanwhile, TurboChef itself has said little. This spring, TurboChef reminded investors that it must be "extremely sensitive and sort of defer to Starbucks" about the coffee chain's menu expansion. Back in 2004, for example, TurboChef disclosed its original contract with Starbucks in the briefest of 8-Ks filed the day before Christmas Eve. TurboChef has since offered very limited updates when asked about the deal, although the company officially added Starbucks to its partial customer list -- for the first time ever -- when releasing its latest quarterly results.

Investors have clearly wanted more. Indeed, many have given up on another Subway-type deal and sold the company's stock short. But some of those bears have started covering their bets in a swift reversal that cut the company's short interest from 40% to 28% last month. Moreover, just this week, a new analyst started recommending the stock ahead of an expected run-up in the shares.

"New commercial customers with large store counts will be game-changing events," Merriman Curhan Ford analyst Robert Straus wrote on Wednesday. "We recommend owning OVEN shares before such announcements occur."

TurboChef's stock bounced on the upgrade but quickly lost some of that ground, falling 1.5% to $11.02 on Thursday. It continues to hover near the bottom of its 52-week range of $10.11 to $20.01 a share.

Customer List

Straus likes TurboChef for multiple reasons.

For starters, Straus notes, the company's biggest customer keeps coming back for more. After ordering thousands of TurboChef ovens -- and watching its growth surge on toasted sandwich sales -- Subway has started installing second ovens in some of its busy stores. Going forward, Straus believes, Subway will increase its second-oven count "substantially" as it adds menu items such as calzone and pizza that require longer cooking times.

Subway currently operates more than 25,000 stores and ranks as the second-largest food franchise in the nation. Looking ahead, Straus expects other major chains to join Subway in placing large orders of their own.

"It is our understanding that there are approximately 30 potential commercial customers currently evaluating TurboChef's products -- including Starbucks, Dunkin' Donuts and

Applebee's

(APPB)

, to name just a few," Straus notes. And "Starbucks and Dunkin' Donuts are both potentially huge customers" for the company.

Notably, Straus points out, Starbucks plans to nearly triple its store count to 30,000. Meanwhile, Dunkin' Donuts operates more than 6,500 stores -- making it the largest doughnut chain in the nation -- and is rapidly expanding as well.

Straus says that two Dunkin' Donuts prototype stores, along with the company's corporate headquarters, have been testing the TurboChef.

TheStreet.com

contacted both of those prototype shops, which confirmed their use of TurboChef ovens and reported favorable responses to their new hot breakfast sandwiches.

Straus suggests that only Starbucks might scare the doughnut chain away.

"It is possible that Dunkin' Donuts may choose another vendor if its largest competitor, Starbucks, becomes a significant TurboChef customer -- a decision independent of its product evaluation, in our view," he writes. But "with that said, we believe TurboChef ovens are performing well and remain positioned to win this business."

Disruptive Technology

By then, TurboChef will likely add consumers to its growing list of customers as well.

The company unveiled its new high-speed consumer oven -- to much applause -- at a major home design show this spring. The oven can cook an entire Thanksgiving turkey in just 42 minutes, TurboChef says, delivering a nicely browned bird that is even juicier than those baked in conventional ovens. It will sell for $6,800 to $7,800 in retail stores beginning this fall.

Straus expects the company's residential business to break even after just two years.

"TurboChef is revolutionizing food preparation for the commercial and residential markets," he says. "Our discussions with industry experts suggest that TurboChef's technology is currently one of the most advanced available today."

TurboChef's senior executives sure seem to think so. After selling their last company to

Eastman Kodak

( EK) at a nice premium, they barely had time to count their millions -- let alone retire on the beach -- before TurboChef won them over and put them in charge. The group landed the big Subway deal less than five months later, putting the company on the map, and has been building up the business ever since.

They control more than 35% of TurboChef's stock and therefore have a clear interest in the company's success. They will strike it rich again -- through vested stock options and change-of-control payouts -- if they wind up selling this company, too.

Straus, for one, views TurboChef as a "highly attractive" acquisition target for the likes of

General Electric

(GE) - Get Report

or

Whirlpool

(WHR) - Get Report

. He sees the company expanding on its own in the meantime.

Specifically, Straus looks for TurboChef to more than double its annual revenue -- to $150 million -- over the next two years. In addition, he believes the company will turn a profit in 2007 and more than triple its per-share earnings the very next year.

"It is our expectation that OVEN shares will also appreciate as TurboChef diversifies its revenue base through an increasing number of commercial customers and residential installations," he concludes. "We recommend investors to buy OVEN shares to take a position before these expected developments unfold during the coming quarters. ... Investors should know that this is an event-driven story."