I'm feeling feisty @OxyBBear, so let me throw some cold water on Sam's rationale (and then others can throw some on my thinking)

I only had a quick look, but I couldn't find what percentage of Breville's sales come from coffee machines -- but it does seem like it is significant. And it's also one of their fastest growing segments. Whether that's a consequence of an expanding market, increased market share, or both, is unclear -- but we do know COVID and the WFH phenomenon was a big driver here in recent years. So maybe that's difficult to extrapolate too much?

But, for the sake of the exercise, let's assume coffee machine sales are ~30% of revenue. Last year that revenue was $1.5b, so we'll go with $500m in coffee machine sales (feels very generous, but let's go with it).

Let's also assume the spike in coffee prices leads to a further 20% in coffee machine sales -- so all else being equal, that'd drive revenue ~$100m or ~7% higher. They get a 35%-odd gross margin, so again if we hold everything else steady we should expect an extra $35m in gross profit or a ~12% lift in EBITDA.

Not terrible. And maybe my assumptions are too timid, and the boost would be more like 18% or so?

But here's my issue. The spike in coffee prices are partly weather and supply chain related -- ie, they are temporary, and not structural factors. The EU is talking about limiting imports of coffee from sources that have caused deforestation, and that's caused importers to build stockpiles. Also a temporary factor (the bulking up of inventories, that is), but to be fair the trade restrictions could have a longer term impact on coffee prices. Still, I believe only 20% of Breville's sales are from the EU.

So, is a largely temporary spike in coffee prices, which may or may not induce more at home coffee consumption, which may or may not equally accrue to Breville relative to other suppliers, which maybe only gives a one-off boost to profits, really a sensible basis for a trade?

After all, the real value of a company is the discounted total of ALL future cash flows. When you play around with DCF models, you see that the impact of the next year or two's cash flows are not as impactful as you might imagine. A lot of value is derived from the long tail of cash flows that are much further out.

So it seems a very convoluted way to try and profit on an expectation for temporarily higher commodity prices. The upside on this set of assumptions (which could be flawed) isn't massive, and could easily be offset by a myriad of other factors.

You have to marvel at the reasoning of a sell-side analyst (and not a very good one at that, see below). Then again, they are in the narrative business, and he tells a good story. I'm just not so sure it represents a compelling risk/reward trade off.

None of this is to speak ill of Breville, of course. As @mikebrisy has argued, it's a great business. I just wouldnt base a purchase on this idea alone.

@OxyBBear sounds like Sam needs to fill MMN today. BRG held of course any extra demand is welcome. lol

@OxyBBear @Strawman @Solvetheriddle I'm glad I'm not an analyst working for a financial institution. I only put out research when I have an insight I want to share. Imagine being bereft of ideas, but having an expectation to publish!

Still, I enjoyed reading @OxyBBear 's post, and @Strawman's thoughtful reply, while sipping my second $BRG Barista Pro brewed Campos "Dark City" blend of the morning. Life is good.

It's true - a proper coffee machine let's us all enjoy great coffee at home. It helps that my uni daughter did 12 months working at Merlo Coffee, and trained my on how to get the settings perfect. (grind level, degree of tamping etc.)

Disc: Held in RL and SM

Thanks Strawman. I've been in the market long enough to know to treat these types of analyst opinions with a large grain of salt. I just found it interesting or probably more surprising that an analyst from a big financial institution thought of this relationship as it never even entered my mind.

Btw, I'm still new to this so can someone advise how I use the hyperlink if I want to refer to someone directly? For example if I want to refer to @Strawman. I'm not very computer literate. Thanks

Absolutely @OxyBBear. I hope I didn't come across as critical of the general observation, which is agree is an interesting one.

I just find it bizarre that analysts can use such an observation as the basis for a trade given the complex and multivariate nature of market pricing.

Also, to add a link, highlight the text you want to hyperlink, and then hit the chain like icon at the top of the text editor. You can then type in or paste the web address you want to link to.

Coffee prices reached record highs today according to the AFR. I wonder how soon before we see a price rise in cafes?

Brazil’s coffee crisis rockets prices to record

Alex Gluyas

The blistering rally in coffee prices reached fever pitch as adverse weather in top producer Brazil wreaks havoc on next year’s crop, rocketing prices of one of the world’s most traded commodities to record levels.

Arabica futures leapt as high as $US3.48 ($5.45) a pound (450 grams) in New York, the highest level in data going back to 1972 and surpassing the previous all-time peak set in 1977. Arabica – the main type of coffee consumed in Australia – has been one of the hottest commodities this year, surging more than 80 per cent.

Soaring bean prices were expected to raise costs for roasters and cafes, and probably flow through to customers. The world’s biggest coffee producer, Nestlé, has warned customers that it will continue to raise prices to limit the impact on its bottom line. The Nescafé and Nespresso maker has delivered two rounds of price increases since 2022.

@Strawman. I know we were kind of taking the mickey out of Sam the Citi analyst for his call but since then BRG has gone on to make a record high as well. Even though I still don't believe there is any relationship, maybe Sam can chalk this one up as a winner :). 

Mike,

can you give us the cliff notes version on why their inventory management approach was that good?

Working in the construction sector. Inventory and supply management were nightmares during that time!

“80-20 on this by end ‘25” (fiscal or calendar?) I’m not sure what “ first incremental SKU live by March” means. Does it mean they paused the re-sourcing and are now restarting?

I read it as the first non-China manufactured 120v product will be live by March with 80% of made outside of China by the end of calendar 2025.

@UlladullaDave that's what I thought, which means it has taken them 2 years to date to start moving production to non-Chinese locations.

At first, I thought that was quite a long time, but then again perhaps not. They have to select the vendors, inspect the factories, have discussions on transfer of designs, tool up new factories, re-arrange the upstream supply chains, negotiate contracts, do pre-production tests etc.

So maybe the whole process does indeed take a couple of years.

I know lots of firms more generally have been using the lessons of the pandemic to diversify beyond China. Countries like Vietnam, Thailand, Malaysia, India and Mexico have been beneficiaries.

You can see the net effect of all this in the changes in FDI in China. Trump will give this even more impetus now.

@mikebrisy Obviously you are more up to date being a current investor

Just goes to show how behind I am with the Breville story and need to do more reading.

Just a quick anecdote … I own a Lelit espresso machine with built in grinder that is currently not working and waiting for spare parts (which were 8-9 weeks away when I first took the machine to the coffee shop and still seem to be at least the same time away 5 to 6 weeks later). For context it is one of the lower models (I think around $1200).

There seems to be no ETA on when the parts might become available and the coffee machine place said they have a bunch of machines from Lelit waiting on parts and that the Lelit supply chain has gone to shit since they were acquired by Breville in 2022 (https://www.afr.com/companies/retail/breville-snaps-up-italian-specialty-coffee-group-20220311-p5a3s0)

Clearly Breville is not the exemplar in inventory and supply chain management that I need them to be right now but judging from this thread looks like they might have bigger issues than just spare parts. Perhaps they also have some work to do on better working out how they manage the spectrum of “higher end” appliances people are going to get serviced and repaired vs cheap Chinese stuff people are just going to replace.

DISC: Not held (anecdote only and really hoping I can resolve this soon as I’m not enjoying the dish water drip filter stuff my wife drinks)