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Coffee Holding Co: 1Q14 Earnings Response; FundamentalErode

3/14/2014Companies mentioned:

Coffee Holding Co. (JVA) - $7.15

Why Read?

On February 3rd, I put out a bearish note on Coffee Holding Company (JVA). Since then the stock hasripped from $4.96 to an intraday high of $8.20 today. This note will explain what I got right and what I

got wrong. Behold."""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""

! Commodity business with zero pricing power: JVA sources and sells green and roastedcoffee beans, which it sources through brokers. Its major customer is Green Mountain CoffeeCompany, which represented 60%, 62%, and 56% in 2013, 2012, and 2011, respectively. Thecompany is very sensitive to coffee prices and can realize huge gains from large rises in coffeeprices, which has happened.

! Asymmetric hedging dynamics leads to losses:In order to guarantee product for customers,JVA must enter long coffee futures contracts. As coffee prices have increased significantly

since November, JVAs 1Q14 (Nov.-Jan.) had $1.03mn in gains from hedging, which was 46%of its $2.23mn pre-tax income, compared to just $0.28mn in gains from hedging which was 2%of its 1Q13 $1.65mn pre-tax income. Since coffee prices have only increased since January weexpect these gains from hedging will be realized, but this is not an improvement in businessoperations, and these gains are not cash gains until booked in 2Q14.

! Inconsistent business: JVA operates a commodity-based business where it facilitates thedistribution of green and roasted coffee beans, its main value add is carrying pricing riskduring its inventory and contract periods. If coffee prices continue to climb, we expect JVAwill report a significant increase in earnings in 2Q14, but it wont be from increased salesvolume or better business fundamentals, just a rise in coffee prices and holding the right

futures contracts.

! Eroding Fundamentals: JVAs gross margin increased +330 Bps in 1Q14 to 15.06% butadjusted for gains from derivatives, gross margin contracted (37) Bps. Operating marginincreased +252 Bps to 8.22% but adjusted for gains from derivatives, operating margincontracted (116) Bps to 4.46%. SG&A also delivered (62) Bps mostly from an increase inofficers salaries offset by a reduction in selling and administrative costs.

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Commodity business with zero pricing power

Asymmetric hedging dynamics leads to losses

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JVAs operational results are completely beholden to the results of its hedging activities as demonstratedby its consistent operating margin results over the last 3 years between +5% and -2%. In spite ofconsistent operating margin results, actual margin dollars have fallen has revenues have declined withfalling coffee prices, another signal of lackluster organic growth.

Risks:

Considering the strong rise coffee prices during Feb. 2014 we believe that JVA will report a strongquarter on the back of hedging gains in 2Q14. Although this will please headline watchers, it does notsignal any improvements in the core business.

Disclaimer:The information contained herein reflects the views of Consumer Fox as of the date of publication. These views

are subject to change without notice at any time subsequent to the date of issue. All information provided in this presentationis for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sellthe securities mentioned or to invest in any specific security or investment product. While the information presented herein isbelieved to be reliable, no representation or warranty is made concerning the accuracy of any data presented. In addition,there can be no guarantee that any projection, forecast or opinion in this presentation will be realized. All trade names, trade-marks, service marks, and logos herein are the property of their respective owners who retain all proprietary rights over theiruse. This presentation is confidential and may not be reproduced without prior written permission from Consumer Fox. Itshould be noted that Consumer Fox has no position in any security of the company mentioned in the report/presentation.

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