$BCCI Something big is brewing out of the state of Washington and it isn’t SBC or Starbucks. Baristas Coffee Company Inc. (BCCI) will be open for business tomorrow in their 5th state as part of their national expansion program, the 1st of 5 in the region. BCCI stock price has now gained 54.35% since bouncing off their June 11 low of 0.046 after closing at 0.071 on volume of 313,857 Thursday. The newest Baristas Coffee, a drive-thru coffee version of Hooters, is scheduled to open June 22 in Scottsdale, Arizona at 17257 E. Shea Blvd.
Have BCCI stock on your list of penny stocks to watch
Baristas Coffee Company Inc. (OTN: BCCI.PK)
Rating: Speculative Buy
hare Statistics
Symbol (OTN) BCCI.PK
Market Capitalization $17.84m
Shares Outstanding 209,268,641
Float: 21.84M
About BCCI Stock
The Company currently has locations in 6 greater Seattle area locations as well as in Texas, Florida, Montana, and Arizona. Historically, all stands have been company owned, however, the Company has begun franchising.
Baristas Coffee announced in April (see here) plans to upgrade the listing of its shares to a senior exchange. In that process, the Company filed its Q1 report. (see here) For the 3 months ended March 31, 2012, the Company reported revenues of $300,011 resulting in a gross profit of $239,439. Net income for the quarter was $84,003.
Bottom Line: This penny stock has had runs before which have started out when BCCI stock price is around 0.075. Considering the fact that the Company reported both revenue and net income for Q1, with Q2 and Q3 being more prone to travelers visiting Baristas locations, those numbers could see exponential increases when Scoupled with the expansion project already underway.
Analyst summary
Baristas is a drive-through espresso company in the development stage headquartered in Seattle,
Washington area. It serves a large variety of specialty hot and cold custom-blended beverages such
as lattes, mochas, sodas, smoothies, blended teas and other drinks, as well as pastries and treats. The
company supplements its revenues with sale of Baristas merchandise. With current locations in
Texas, Washington, Florida and New Jersey, the company plans to expand its operations nationwide
by opening new coffee-stands, acquiring established businesses that fit its model and through
franchising.
The distinguishing feature of this company is the experience it offers to the customer. The beverages
are made and served by young, attractive women, which are trained in interacting with customers to
maximize sales. On top of that, all the baristas wear appealing, ever-changing costumes, offering
their customers an intriguing experience with each visit.
A conservative look at Baristas’ development program suggests that the company should be valued
at $0.22 per share. However, if the company succeeds in fully executing its plans over the course of
2012, we estimate that it will be worth double the amount - $0.44 per share.
Investment Highlights
Revenue growth momentum Although Baristas is still in the development stage, it has been registering net profits since Q4-2010. During the first nine months of 2011, turnover totaled $738 thousand, with a net margin of 22.4%.
The management believes that while the competition is tough, there are opportunities to expand
rapidly using an effective marketing strategy. For instance, in December 2011, Baristas engaged an
Emmy award winning producer for the production of an entertaining reality television series based
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on the Baristas business model and several of Baristas’ young employees, which should
significantly increase its brand awareness.
Recently, the company announced an agreement with DCB Management Group to open five new
company-owned Baristas coffee locations in Phoenix, Arizona metropolitan area, which will be
managed by DCB. The coffee shops are expected to be open before the end of March and will make
Phoenix the company’s second largest market. Baristas expects to open up to 100 coffee stands (50
company-owned and 50 franchised) by Q4-2012.
Attractive concept based on selling experience
The coffee industry has changed significantly over the last decade due to rapidly evolving consumer
preferences. Old style coffee shops are transforming, looking for new ways to attract customers by
combining a wide variety of high-quality coffee drinks with an enjoyable experience. Certainly,
Baristas’ model is based on offering a distinct appealing experience, which is similar to Hooters,
Tilted Kilt and other companies.
Experienced management team
A strong and diversified management team is a significant asset for any development-stage company
and Baristas seems to have one. Barry Henthorn, CEO and Chairman of the Board, has an extensive
experience in founding and managing start-up companies and represents the “visionary” for
Baristas. He founded two telecommunications technology companies and an internet media
streaming company. The company’s President and Director, Troy Scott, has nearly 20 years
experience in the construction industry and holds a BSc Degree in Business Management from
Boston University. Mr. Troy has a solid track record in building design industry and raising capital
for large projects. Thomas E. Metzger, the company’s Chief Operating Officer, brings rich
experience in brand and franchise development, which should help Baristas to further grow the
concept. He is considered a restaurant industry veteran, having previously served as CEO, President
and COO at various notable restaurant chains, such as Sizzler USA, Wolfgang Puck, Kenny Rogers
Roasters and others. Recently, Baristas engaged Richard Lewis as Senior Vice President of
Corporate Communications. Mr. Lewis has extensive experience in public relations, successfully
directing the media campaign for “Worldwide Wrestling Entertainment” and the TV series
“Baywatch. He also represented numerous large corporations, notably Hilton Hotels, Ford Motors,
Jockey International, as an executive at Rogers & Cowan and Mahoney/Wasserman.
This management background and diversity is very valuable for Baristas, as the company plans to
expand aggressively and promote its brand throughout North America.
Investment Risks Highly competitive market
The coffee marketplace is mature and saturated with large established companies such as Starbucks
Corporation, Yum Brands, Dunkin’ Brands Group, as well as local independent coffee shops
competing with Baristas. However, Baristas’ specific business model should offer a strong
differentiator from the rest of market players. On a positive note, United States is one of the leading
consumers of coffee in the world, according to the Coffee Research Organization, and in 2011,
coffee consumption has increased, with 54% of adults age 25-39 (main customers for Barista)
saying they drink coffee daily compared to 44% in 20101. Also, the coffee industry appears to be
more resilient to a challenging economic environment2, although consumers are becoming
increasingly “picky”.
Lack of financing
Our valuation of BCCI is based on estimated financial performance according to the company’s
development plans. Baristas intends to open 50 new owned stores and 50 franchised shops in 2012.
1 Source: www.ncausa.org/i4a/pages/index.cfm?pageid=731
2 Source: http://www.franchisedirect.com/coffeefranchises/coffeefranchiseindustryresearchbusinessreporti/74/220
3 Source: http://www.kirotv.com/news/news/feds-target-seattle-area-baristas-coffee-company-a/nDySm/
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DCF model assumptions
Stock Price, $ 0.123
Shares Outstanding, Mn 209.3
Market cap, $ Mn 25.7
Book Value of Net Debt, $ Mn 0.0
Enterprise value, $ Mn 25.7
Beta 0.90
Market premium 5.0%
RiskFree Rate 1.9%
Cost of Equity 6.4%
Long-term Equity Weight 100%
Cost of Debt 10.0%
Long-term Tax rate 38%
Tax Effected Cost of Debt 6.2%
Long-term Debt Weight 0%
WACC 6.4%
Terminal growth 2.0%
Forward diluted shares, Mn 276.8
The beta is average of peer betas (Baristas’ beta is not reported). The forward number of shares
assumes that in 2012, Baristas will satisfy 50% of its funding requirement ($2.2 million out of $4.3
million in total) by issuing equity (about 17.5 million shares), and that there will be an additional
issuance of 50 million shares for various purposes (funding, stock awards etc.).
DCF valuation
DCF valuation - FCFF $ millions
DCF stream 32.5
DC terminal value 123.8
Total DC Enterprise Value 156.3
(Less) Net Debt 0.0
Equity Value 156.3
Price target, $ 0.56
Peer valuation
Peer valuation is not straightforward for BCCI, mainly because its operations are in early stage and
don’t reflect expected future performance. We therefore applied a premium to peers’ median P/E
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and P/S multiples to reflect the future growth potential and the unique business model. For peers, we
used six companies that serve coffee:
? Starbucks $SBUX
? Tim Hortons Inc $THI
? Dunkin Brands $DNKN
? Caribou Coffee Company $CBOU
? Panera Bread Company $PNRA
? The Second Cup Ltd $SCU
Peers’ median forward P/E and P/S multiples for 2012 stand at 20.5 and 2.3, respectively. Applying
a premium of 300% to each multiple results in Baristas’ valuation of $0.42 and $0.20 per diluted
share, respectively, or an average of $0.31 per share. The premium was chosen based on estimates
of revenue and earnings growth over the next ten years, which are expected to grow by a factor of
8x between 2012 and 2021.
Final valuation
The average of absolute and relative valuations produces a target price of $0.44 per share. However,
this valuation is contingent on Baristas obtaining financing and executing its business plan fully and
without a delay.
To allow for possible deviations, we will apply a discount of 50% to allow for numerous risks
associated with early stage businesses without funding. Thus our price target is $0.22 per share,
while $0.44 should be possible. BARISTAS CO. IS NOW WORKING WITH NESTLE 