Green Mountain Coffee Roasters Inc. (GMCR) shares had a phenomenal run for over six months after bottoming out at $17.11 in July last year. Between July 24, 2012 and February 6, 2013, GMCR shares surged nearly 180%. However, the six-month long rally ended earlier this month after Green Mountain Coffee Roasters gave a weak sales forecast for its second quarter.
While Green Mountain Coffee Roasters has been a top pick in the last six months, the company's weak outlook and an expected rise in green coffee prices is likely to put pressure on GMCR shares. On the other hand, Coffee Holding Co. Inc. (JVA) will benefit from a rise in green coffee, which is why I believe that JVA is a better bet than GMCR going forward.
Rebound in Coffee Prices
Coffee was the worst performing commodity in 2012. According to the Standard & Poor's GSCI, coffee prices fell more than 40% during 2012. While the sharp decline in coffee prices has benefited Green Mountain Coffee, it has been a concern for Coffee Holding Co. However, coffee prices could see a rebound in the second half of 2012.
Arabica coffee beans, which are used by Green Mountain Coffee in its K-Cups, have seen a sharp decline in prices mainly due to record crop from Brazil. The increased supply is likely to keep prices under pressure in the near-term. However, a fungal disease (roya) outbreak in Central America could hurt coffee output from the region. Lower output from a major coffee producing region is likely to have an impact on prices at some stage.
In a research note recently, Rabobank said that Arabica-coffee prices will likely bottom out in the first half of the year as the effects of the roya outbreak will be felt more strongly in the next coffee season, which begins on October 1. With prices expected to rebound in the second half of this year, Green Mountain Coffee Roasters could face margin pressure. Meanwhile, higher prices will benefit Coffee Holding Co. This is one of the main reasons why I like JVA more than GMCR at the moment.
Despite Declining Green Coffee Prices, JVA Posts Strong Results
Although coffee prices fell sharply in 2012, Coffee Holding managed to post record net sales for the year ended October 31, 2012. For the fiscal year 2012, JVA's sales grew 18.3%, which is impressive given the sharp decline in coffee prices. The company posted record net sales of $173.66 million for the year. Its net income for the year was $2.49 million, or $0.39 per share.
Andrew Gordon, President and CEO of Coffee Holding, last month said that the company increased its revenues by 18% for 2012 as a substantial increase in poundage offset lower and extremely volatile coffee prices during the year. Gordon added that more importantly, the company's efforts to improve its gross margin were rewarded as it was able to improve its gross margins to 6.8% for the year.
Commenting on the OPTCO subsidiary, Gordon said that the collapse in green coffee prices had a negative effect on OPTCO's profitability, which negatively impacted the company's profitability as a whole, however, the disposal of high priced inventories at OPTCO combined with a more favorable green coffee market heading into 2013, will return the subsidiary to the levels of profitability achieved in prior years.
Green Mountain's Weak Sales Forecast
While Coffee Holding gave a bullish outlook for 2013, Green Mountain Coffee recently provided weak sales forecast for its second quarter. The company expects its revenue in the second quarter to increase between 14% and 18%, which is below the consensus forecast. Not surprisingly, investors were disappointed with the company's outlook.
Although the company has maintained its forecast of sales growth of 15% to 20% for the full fiscal year, increasing competition could have a negative impact on top-line growth.
Green Mountain Coffee Roasters' K-Cup, which account for bulk of the company's revenue, could face increasing competition going forward due to the expiration of a number of patents. In the single-cup brewer market, Green Mountain Coffee is still the dominant player, despite the launch of Starbucks Corp.'s (SBUX) Verismo brewer. While Verismo does not pose any major threat to GMCR in the single-cup brewer market in the near-term, competition could intensify in the medium-to long-term.
Brian P. Kelley, President and CEO of Green Mountain Coffee Roasters, earlier this month, gave a bullish gross margin outlook for the company's full fiscal year. However, the outlook was based on lower green coffee costs. If coffee prices rise as expected in the second half of this year, GMCR could see face margin pressure.
Coffee Holding Vs Green Mountain Coffee Roasters
In the end, it all comes down to green coffee prices. If prices bottom out as expected and see a rebound in the second half of the year, Coffee Holding stands to benefit. Green Mountain, meanwhile, as I said could face margin pressure. In addition, Coffee Holding was able to grow its top-line in fiscal year 2012 despite the sharp decline in coffee prices. The company also saw its margins improve. On the other hand, Green Mountain Coffee Roasters' sales outlook for the second quarter raises concerns. Also, increasing completion could hurt the company's top-line growth. Given all these factors, I think Coffee Holding is a better bet right now than Green Mountain Coffee Roasters.
Disclosure: I am long JVA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.