Caribou Coffee Could Reward Small-Cap Investors

One great way to look for potentially undervalued companies is by using a stock screener. In this way, investors can quickly pinpoint companies that have metrics which they view as attractive. Recently, a quick screen of the micro-cap space revealed a stock that I have been familiar with for quite some time, but other investors may not be. I used 7 metrics in order to filter the micro-cap universe for potential opportunities. First, the company had to have a market cap of below $300 million. The stock also had to have a strong Buy rating from sell-side analysts. The fundamental requirements that I used for the screen were a P/E of below 15, estimated EPS growth for next year over 15%, estimated EPS growth over the next 5 years over 15%, return on equity over 15%, and quarter over quarter sales growth over 15%. This screen yielded 7 names, and one of them stuck out because it is a company which I admire and have followed for several years. The company is Caribou Coffee

and the stock appears to be a promising opportunity. Caribou is basically a Starbucks

, but in my experience, it is better. I really like their coffee shops. My experience is that Caribou's decor is cozier than Starbucks, the coffee is better, and they also had free internet in my local coffee shop before Starbucks did. Overall, my interaction with the Caribou brand has been very positive, and I think this is important in evaluating a retail oriented company. Caribou Coffee has 534 coffeehouses, including 121 franchised locations. Its coffeehouses are located in 20 states, the District of Columbia and international markets. Caribou Coffee is also available through grocery stores, mass merchandisers, club stores, office coffee and foodservice providers, hotels, entertainment venues and e-commerce channels. The company also sells its coffee and licenses its brand through Green Mountain Coffee Roasters'

Keurig, Inc. for sale and use in K-Cup single serve portions. The company has a tiny market cap of $263 million, which is obviously just a fraction of Starbucks' market cap, or even that of Dunkin Donuts

. Caribou, however, is benefiting from the same trends in the coffee business that have been pushing coffee stocks higher in the last couple of years. The fundamentals look quite solid with revenues increasing along with operating margins over the last 5 years. The company recorded a loss in 2006, 2007, and 2008, but is now profitable. Revenues rose from $257 million in 2007 to $284 million in 2010. This year analysts expect the company to record revenue of $318.83 million. Next year that number is expected to grow to $355.19 million. On the revenue front, the trend appears to be very positive and accelerating. Earnings trends also look healthy as Caribou went from a $1.36 per share loss in 2007 to a $0.46 per share profit in 2010. This year, analysts anticipate the company will post EPS of $0.40 and then $0.50 in fiscal 2012. Shares trade at around 25.40 times forward earnings estimates and a PEG ratio of 1.44. This is not necessarily cheap, but it seems like a reasonable valuation for a fast growing coffee company. The company's return on equity was a very impressive 19.76% in the third quarter, and is expected to be 16.65% for all of 2011. Wall Street analysts also like the name with a mean recommendation of "strong buy" and a median price target of $19.00. Shares currently trade at $12.70. That leads us to the final part of the CBOU equation which is its extremely strong performance over the last couple of years. The long-term chart looks great. In January of 2009, this was a $1.50 stock. The stock has gone up more than 8.5 times from those levels and has been rising consistently and steadily since the March 2009 stock market bottom. Thus far in 2011, CBOU is up 26%, but well off of its high of $17.40. If CBOU can continue to grow at a strong clip and beat Wall Street expectations there is a good chance for share price appreciation driven not only by earnings growth but also P/E expansion, particularly if it can continue to ramp up its revenue trajectory. In any case, with the bull market in coffee stocks still appearing to be in place, this is certainly a small-cap name to keep an eye on.