Green Mountain Coffee: Wake Up and Smell the Trend 8 comments
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An investor never really knows for how long a company or its stock will continue to trend -- whether positively or negatively sloped -- but each trend provides many signals that alert of a change of direction. A stock is even more clear than a company (even the parent company of the stock in question), because signals from a stock chart are fairly objective; only their interpretation is subjective.
Consider, for example, Green Mountain Coffee (GMCR). The company's Keurig remains the leading single cup coffee system -- and still in the early stages of development (of its opportunity). Estimates for the brewer and K-Cup growth remain conservative despite the difficult consumer environment. The general theme among the single cup coffee companies -- Keurig, Tassimo, and Senseo (which is the maker I own, for the opportunity to obtain Douwe Egberts coffee in the U.S.) -- is that single-cup coffee represents a value alternative to coffee shop fare. An arguable point, for sure, because no one really wants to become an at-home barrista. Keurig's strength has been a bright spot for its retail partners in the present terrible economy, so the company's biggest opportunity is not solely via increasing distribution but through a greater presence in existing retailers (such as Costco (COST)), which helps make the Keurig and the K-Cups easy to find and purchase. Also, the variety of blends (K-Cups) helps drive return store visits and reinforces the razor/razor blade model of organic growth, which in turn makes everyone happy; store, company, consumer, and shareholder.
Reuters states that, "Green Mountain Coffee Roasters is engaged in the specialty coffee industry. The Company sells over 100 whole bean and ground coffee selections, hot cocoa, teas and coffees in K-Cup portion packs, Keurig single-cup brewers and other accessories. The Company manages its operations through two business segments, Green Mountain Coffee and Keurig, Incorporated (Keurig)..."
Growth at the company has been tremendous, even torrid, as it builds rapidly toward a solid second place position (behind Starbucks (SBUX)) among coffee-roasters/sellers. One crucial difference, though, between Starbucks and Green Mountain, is that Green Mountain currently is in the process of rapid growth, whereas Starbucks retrenches. The stock chart for GMCR reflects the company's success:
[click on charts to enlarge]
Likely the first item to catch your eye in the chart above is the continuing major and primary up trend from $1 in 1999 to $53 ten years later (today). The second item that might catch your notice is that the stock has risen, or at least not declined, during primary bear markets (e.g., 2000-2002, 2007-2009), which qualifies the stock, and company, as a market leader. The third item you might notice are the lengthy bases (2001-2006, 2007-2009) that interrupt, but do not impede, the stock's continuing primary up trend. The fourth item that likely escapes your notice is that trading volume increases, despite the ever-higher share price; decidedly bullish price and volume action.
Big Base Breakout
The past 18 months (see chart below) show another big base, or high level consolidation, for Green Mountain - until the shares broke out and up last month (March); right now all trends -- short, intermediate, and long term -- are in gear to the up side.
With increasing sales, revenues, and profits, a rising stock price, and the opportunity to purchase competitors with appreciated stock, the sky seemingly is the limit for Green Mountain. No tree grows to the sky, however; for example, my initial intermediate term objective of $60-65 nears.
As always, the onus remains upon the investor to watch for a change in trend for a company and its stock. My next post will discuss this topic.
Full Disclosure: Long Green Mountain Coffee Roasters
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This article has 8 comments:
From DDRX's annual report:
"Our management has developed an annual operating plan for the 2009 fiscal year and we expect a return to profitability and to generate positive cash flow in the year ahead. We have taken steps to shift focus of our available resources towards strengthening of the wholesale business segments in order to sustain our our projected growth in fiscal 2009."
It seems they may be right on target with this plan as the 2009 fiscal year starts in July for them.
As far as the first 2 Q's of 2008, Wholesale revenues alone were $24 million, if they increase revenues only 25% per quarter (they did 32.5% from Q1 to Q2), total Wholesale revenue will be in the $63 million ballpark.
If they can grow this business by 50% in 2009, the Wholesale revenue alone will be close to $100 million. If they plan to be profitable and can flow thru the same margin that GMCR does to the bottom line (4.5%), they can earn $4.5 million, or .82 a share in fiscal year 2009.
Current PE would then be 3 versus GMCR at 42, PEET at 28 and SBUX at 52. A similar PE to GMCR would place DDRX around $33 per share. Cut the PE in half and you still have a $15-$18 stock.
DDRX also has 18 of the top 50 sellers on Amazon vs GMCR's 3. DDRX's Donut Shop is also the best seller among all grocery items at Amazon.
After these facts came to light, I felt that taking a pass was most likely in my best interest, however for those who are not expecting to hold it for a prolonged period of time, this may be a very good buy.
Management has proven incapable of turning their sales growth into expanding margins or actual cash flow.