Luckin Coffee Offers Growth And Coffee At A Reasonable Price

seekingalpha09-25

Luckin Coffee is a fast-growing company with over 10,000 stores in Beijing and locations in 300+ Chinese cities, showing strong revenue growth.Despite intense competition and declining margins, Luckin...

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Robert WayI don’t feel like I’m going out on a limb saying I like coffee. Looking around most of the world, it seems like almost everyone likes some type of coffee, and there are a lot of companies around the world that are making very good money on the provision of coffee to consumers. Historically, we think of China as a country where most of the population drinks tea, but coffee is actually pretty popular there as well, and with stores often offering both tea and coffee at the same location, that and over a billion people is a big market to attract. Today, we’re going to be looking at Luckin Coffee (OTCPK:LKNCY), a fast-growing group of stores that offer coffee and tea around China, and have a small presence in Singapore. Luckin Coffee has over 10,000 stores in Beijing alone. That’s not to say that they’re anything like a monopoly, and indeed there are always other coffee and tea shops around wherever one goes, so they face heavy competition in the face of their opportunity to continue growth. Beijing is their main place of business, but Luckin Coffee also has locations in over 300 other cities in China. To the extent that the economy and consumer demands continue to support their operations, they could get quite a lot bigger in the years to come. They’re a company bringing in billions of dollars of revenue per year, but they’ve only been around since 2017, a relative newcomer to the market, so they are by no means a fully mature operation yet. A Balance Sheet that Supports Growth       Cash and Equivalents $477 million   Total Current Assets $1.1 billion   Total Assets $2.7 billion   Total Current Liabilities $827 million   Total Liabilities $1.3 billion   Total Shareholders Equity $1.26 billion   Click to enlarge (source: most recent quarterly 6-K from SEC) Luckin Coffee is very much positioned as a growth company, and has managed to do so thus far without amassing too much debt. That’s hugely important, and the company has a current ratio of 1.33, which gives the company a decent amount of flexibility to continue supporting their growing operations. On the other hand, even with the company trading on the lower end of its 52-week range, Luckin Coffee is still trading at a price/book ratio of 5.07. That’s a bit high, and the sector median is 2.17. That isn’t a necessarily disastrous premium, but it is one respect in which the company is not particularly cheap right now. Declining Margins Luckin Coffee ADS hasn’t done great so far this year, and the pessimism surround the company recently seems to be driven at least in part by a weakening operating margin. Some of that was attributed to seasonality, hot weather isn’t good for coffee sales, and some of it is also a function of the intense competition that they continue to face. At the same time, coffee shops in China are just plain growing at a rapid rate, and even if that means the margins are going to be under pressure, that’s underscoring the company’s persistent status as a big growth company in a big, growing marketplace. While the growth for the company is likely to remain China-centric, they are also planning to expand into Malaysia in the future, which is another market that could be generating strong revenue growth for them in the years to come. Strong Revenue Growth and a Nice P/E            2021 2022 2023 2024 (1H)   Total Revenue $1.1 billion $1.9 billion $3.5 billion $2.0 billion   Operating Income ($77 million) $164 million $430 million $136 million   Net Income $82 million $69 million $405 million $108 million   Diluted EPADS 31¢ 22¢ $1.27 32¢   Click to enlarge (source: most recent annual 20-F and quarterly 6-K from SEC) Competition notwithstanding, the total revenue line for Luckin Coffee shows some pretty juicy growth. The operating and net incomes have been growing right along with the revenue, and it is resulting in earnings per ADS that are bringing this more into the range of a value stock than the growth stock it really is. While there is some pressure on the operating income side of things because of the aforementioned margins, the estimates suggest that the strong growth is only going to continue. This year the revenue is expected to be up to $4.66 billion, and next year it will go up even further to $5.73 billion. That’s a good step in the right direction. The earnings per ADS are similarly headed the right way. The expectation is this year will be $1.25 per ADS, which is a P/E ratio of 16.09. That’s slightly lower than the sector median of 16.43. Next year’s estimate is $1.87 per ADS, which means a forward P/E of 10.77. That’s quite low for a company growing like this, and another encouraging sign. Definitely a Buy for Growth Investors Data by YCharts Luckin Coffee has been trading at the lower end of its current 52-week range, and to me that seems to defy the general direction that the company is trending, which is strong growth and expected strong future earnings. I consider this a buy at these current levels, and feel that in the long run the company should continue to perform quite well. There’s always some reticence in buying growth stocks based in China because often the public expectation for growth in a market that size extends beyond what is realistic. In my opinion, Luckin Coffee is more than sensibly priced at these levels, and the growth anticipated in their estimates appears to be very attainable. For investors, I would advise keeping an eye on the rate of growth, which is part and parcel to the justification of paying five times book value for the company. I would also keep a close eye on the operating margins in future quarters to see that their profitability isn’t in serious jeopardy, as that could derail the expected earnings going forward.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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