Friday, September 4, 2009

Green Mountain Coffee Roasters is piping hot!

The US consumer is currently tightening their belt, losing their jobs, and hunkering down to rebuild their retirement funds. Based on the numbers reported by Green Mountain Coffee Roasters (GMCR), buying a coffee machine seems to be the first step on the road to economic recovery for the American consumer.

As a budding short seller, this stock seemed like a prime candidate to profit from as expectations hit the rocks of reality. At first glance, GMCR holds all the initial signs of a momentum stock out of control. GMCR currently holds a $2.2B market cap and a 47 P/E ratio in a market with declining consumer spending across the board. Yet by the end of the analysis, GMCR looked a momentum stock with a full head of steam with more upside than downside. Here is why....

* GMCR products achieve great customer satisfaction

“During the quarter, we reconfirmed that consumers remained extraordinarily satisfied with the Keurig brewer system. Our quarterly research reconfirmed a top two box satisfaction score that exceeded 92% for all brewer models.”

“Our outlook for fiscal 2010 anticipates a net sales growth rate of 45% to 50%, shipments of system wide K-Cup portion packs to increase in the range of 65% to 70% and fully diluted GAAP EPS to be in the range of $1.70 to $1.80 per share.”(1)

* GMCR has solid organic growth

[Q3 2009]
“It certainly was another outstanding quarter for Green Mountain Coffee Roasters. Net sales totaled $190 million, up 51% over the last year with each business unit contributing strong sales growth. After inter-company elimination, the Keurig business unit net sales were up 97% to $90 million and the Specialty Coffee business unit net sales were up 39% to $100 million. ….
The primary driver of the increase in net sales is the continued growth in K-Cup sales which were up over 79% on a consolidated basis. Sales related to the Tully's brand represented approximately 5.5% of the 61% increase in consolidated net sales and are included in the Specialty Coffee business unit results for the first time.”(1)

* GMCR is rapidly developing new channels for growth and market penetration

“In our third quarter we announced two new licensing initiatives. We licensed Con-Air Corporation to launch a Cuisinart branded Keurig brewed coffee maker during the first half of 2010. We also licensed Jardan to launch a brewer under its Mr. Coffee brand expected during the second half of 2010.

These initiatives are consistent with our fundamental razor blade approach to growing the business which focuses on getting brewers into more households in part by providing consumers with more looks, features, brand choices and price points. Both product lines will be co-branded with Keurig and designed to work with the 200 varieties of gourmet coffee, tea and hot cocoa packaged in Keurig's patented K-Cup portion pack.

With Keurig, Cuisinart, Mr. Coffee all offering Keurig brewed technology, we are seeing to maximize the visibility of Keurig and expand choices for the consumer, thus accelerating the adoption of single cup brewing into homes across North America.”(1)

* GMCR signed deal to sell in Wal-Mart

Wal-Mart is a huge new retail relationship for GMCR to sell the Keurig systems. Although Wal-Mart has a track record of cutting margins on the units it sells, GMCR makes most of their money through the proprietary K-Cup they sell. The Keurig system requires using the K-Cup to function and the owner must keep a supply of cups on hand.

* GMCR has attracted hedge fund interest [Look out for the squeeze, short sellers!]

“In a 13G filed with the SEC, Stephen Mandel's hedge fund Lone Pine Capital has disclosed a brand new position in Green Mountain Coffee Roasters (GMCR). The filing was made due to activity on August 19th, 2009 and Lone Pine now shows an 8.3% ownership stake in the company with 3,603,364 shares.”

Finally, it is very difficult to estimate how much impact all of these new initiatives will have in total. But I am confident that GMCR will have ample opportunity to blow away current sales guidance. That is information that should make any short seller pack up and go home. Or just buy a few shares and go along for the ride.

(1) GMCR, Q3 2009 Results Conf Call Transcript

The author has an order to buy GMCR at $54/share.


Lockstep said...

GMCR is showing volume action like it is going to break out sooner rather than later. Also, in reviewing my recent picks I have consistently been too conservative in my price estimates so this time I am being a bit more aggressive.

The order is modified to purchase GMCR at $63/share

Lockstep said...

Position entered on December 3rd at $63/share.

Lockstep said...

Considering the volatility in the market I have put a stop loss on this position at $80.5/share on Feb 11, 2009. If Europe gets hit, everything will get hit.

Lockstep said...

Stock hit $92 today. Moving the stop loss up to $85.

Lockstep said...

Exited position today at $84/share.


Things look very green for green mountain.