Green Mountain Coffee: Roasting Shorts on the Way to $100

Wednesday night Green Mountain (GMCR) reported sales jumped 60% and earnings surged 118% to 50 cents per share (38% better than already raised estimates). In addition, the company announced a massive distribution deal with Wal-Mart (WMT) to sell the Keurig Elite B40 Single-Cup Brewer and a variety of K-Cups. With a stunning 50% of the stock short (I cannot think of any company in America I would be so scared to be short) we will most likely see GMCR trade well into the $60's on Thursday. Analysts will all be raising estimates and targets Thursday morning for sure. Here is how I get to $100 for GMCR:

• GMCR is building an amazing recurring revenue business. Once a Keurig coffee machine is placed in homes, hotels and offices, the company has built in recurring sales for a long time.
• With a market cap of just $1.3 billion, this is still a small cap company compared to its potential.
• I am sure Mars would love to buy them out, but bet the company won't sell because it knows it is leading a revolution.
• The company expects to expand its K-Cup production from 2 mln per week to 8 mln per week by this fall. Who else do you know that is expanding production 4x?
• The company is making good progress on the grocery store front, as it is currently in 3,800, but the goal is to get to 15,000 locations.
• Once people buy a Keurig coffee machine, they are buyers of K-cups for a long time.
• This is an unreal OPEN ENDED situation in my mind. Open ended means the company can sell in so many more places and around the world for years to come. The years to come part is what gives stocks a much higher PE. I now think it can (will) earn $2.50 EPS next year (starting 9/09). Put a 40x multiple on this and the stock is $100 before the end of this year.
• My conviction level from 1-10 is 10. I do not post such conviction lightly.

Disclosure: Long GMCR.

Comments

[brownhornet:]

Ok, c'mon. I know you live in the US but even you must know 40x multiples are not a realistic valuation method and certainly not sustainable. There is also no balance sheet support of that valuation so any earnings surprises would hurt greatly.

PS, I'm (about to be) long so don't think I'm talking it down! I think there is definitely earnings momentum to be had here and a great sales strategy. Reminds me of the Rolls Royce aircraft engine strategy: sell at cost and lock them in to long term service deals.

Apr 30 08:51 AM

[Glen Bradford:]

I shorted this in my CAPS account. The P/E is unjustified in the current economic climate --- and in my opinion is mostly due to shorts getting roasted. It's due to underperform the market in the next 6 months. That's my take. Price is what you pay, value is what you get. The people buying this are the people that shorted it earlier. I don't see any new demand generation.

Glen

Apr 30 11:25 AM

[Jae Jun:]

Im glad you are doing well with this but its all to easy to get excited and eventually lose it all.

Reminds me of when everyone was saying GOOG was a $1000 stock and AMZN had to be $100.

Apr 30 12:59 PM

[swagvalance:]

Worse, I don't like the coffee -- let alone the K-Cup format, which seems cynically designed in the 1990s for maximum environmental waste.

Apr 30 06:03 PM

[NuclearNeil:]

Look for one of the "bigs" that have shorted this stock to plant some negative news on some financial blog somewhere that trashes this stock and allows them to get out of their short position relatively unscathed. It worked with the financials on April 20th.

May 01 09:26 AM