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Green Mountain - The Upside Isn't There

August 22, 2013 | About:
CMI Research

CMI Research

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Green Mountain Coffee Roasters (GMCR) Inc. engages in the specialty coffee and coffeemaker businesses. Green Mountain has seen earnings skyrocket 20-fold since 2006. More recently, it's consistently beat consensus earnings estimates and increased earnings guidance. Cash flow and margins also have trended higher. The below one-year chart shows a 56% increase in share price over this period.

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The real question is, what level of revenue growth can we expect going forward and how much of that has already been priced into the stock? Green Mountain is currently trading at its 52-week high of $83.77, with forward P/E of 23.55. Its peer group P/E averages 19.18. The reason cited for this difference is that Green Mountain has expected upside potential in forecasted earnings growth of 19.5% versus 17.2% for the peer group.

Green Mountain is certainly the leader in its field. No one disputes that. Industry analysts estimate that Keurig (one of the segment of GMCR) has a staggering 85%-90% market share for single-cup brewers in the at-home segment. However, where can they grow to from here? Green Mountain has seen nice profits recently through increased K-cup sales and lower coffee prices. However, of late, brewer sales have actually been down which, as a leading indicator of their business, is troubling.

Strategic Initiatives:

Out of necessity, the company is currently looking at expanding into the away-from-home market. The three components within that category are workplace, food service, and travel, leisure and hospitality. "The hot beverage opportunity within away-from-home is estimated to be a $10 billion opportunity. And when we look at the percentage that Green Mountain and Keurig claim of that opportunity, it's actually pretty small," said Suzanne DuLong, VP of corporate communications and investor relations at GMCR.

Green Mountain is also looking to tap into markets for carbonated drinks, juices, sports drinks and even dairy and soups. It estimates the average U.S. daily household consumption of non-alcoholic beverages at 19.1 servings per day. Coffee represents 13% of it. And the top five categories — water, carbonated drinks, coffee, juice drinks and tea — make up rest of total consumption.

Nothing official has been announced yet, but the company has thrown out some hints, and we are hopeful that at it's first-ever investor day on Sept. 10 in Boston, it will make an exciting product or partnership announcement. We are expecting that they are going to be unveiling new product, which hopefully will be available in time for the holiday season. They have already talked of their intention to move into the single serve carbonated beverage market, which is much larger than the coffee market. They recently filed a trademark for a product which is widely believed to be a new soda making machine.

It's important to mention the persistent rumors of a possible buyout by Coca-Cola (KO), similar to rumors of a buyout of Sodastream (SODA). However, there has yet to be any concrete evidence that this could occur anytime in the near future.

Management Activities:

  • While the company was focusing on single-serve packs for the office, research showed that 65% of office coffee is still brewed by the pot. That's why it recently introduced its new carafe brewer, Bolt. Green Mountain plans to market it initially to the workplace, specifically targeting offices that have volume-brewing opportunities, such as large and midsize offices. The Keurig single-serve system will still be marketed to smaller workplaces.
  • It appointed ex-Coca-Cola executive Brian Kelley as its CEO in late 2012.
  • Green Mountain has proactively responded to the demand shock to their supply process by doubling the capacity of larger facilities to accommodate the increasing demand.
Institutional Investor Activity:

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Institutional investors are accumulating GMCR to capture a huge piece of the ownership pie.

Institutional investors purchased a net $7.4 million shares of GMCR during the quarter ended June 2013, and now own 89.05% of the total float. Despite these lofty number, this is a percentage that is typical for companies in the Food: Specialty/Candy industry.

Analyst Calls:

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Eleven analysts (as collected by Yahoo Finance) have an estimated high of $98, with a low of $72. Eleven analysts (as collected by CNN Money) have a "buy" rating, with only one analyst giving it a "sell" rating.

Conclusion:

Green Mountain Coffee Roasters has had an astronomical run. Is it likely to continue? That's a difficult question to answer. The company is at a crossroads. Over the last couple years it has offered more and more K cup options. However, the positive impact diminishes with each new offering. There isn't much room to increase market share in the coffee at-home segment, which requires it to move into adjacent segments. Whether it's at-home carbonated drinks or some other product, moving into adjacent segments is always a risky endeavor. Green Mountain has a solid base from which to attempt to move into new segments. However, while there may be the potential for some upside down the road, I believe that an investment in Green Mountain would not be the best use of capital at the moment.

Rating: 3.3/5 (4 votes)

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