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) -- 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


fertilize earnings growth. In later years, partnerships with

Whole Foods


and gourmet stores aided revenue expansion without compromising quality.


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, 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.

Peet's stock has advanced 25% this year, outpacing the

Dow Jones Industrial Average


S&P 500 Index

, though trailing Starbucks, which has more than doubled. Over one year, Peet's has returned 24%, more than major U.S. benchmarks.

The company recently announced a licensing agreement with privately held

Godiva Chocolatier

to sell a new line of coffees in supermarkets and mass-merchandise outlets. We rate Peet's "buy" and recommend the shares for purchase.

-- Reported by Jake Lynch in Boston.