This week, two of the most debated momentum names will report their quarterly earnings, both on Wednesday. SodaStream (SODA) will report before the bell, while Green Mountain Coffee Roasters (GMCR) will report after the bell. These two names have been widely discussed in the past two years, sparking some of the best bull/bear debates in recent history. Today, I'll preview each name's earnings, covering expectations, what to look for, and discuss how the stocks might react after their respective reports.
Green Mountain Coffee Roasters:
Since Green Mountain is the larger name in terms of sales and market cap, I'll start with that company. It's been nearly three months since Green Mountain reported its fiscal first quarter results. As a reminder, Green Mountain's fiscal year ends in September, so this quarter they will report will be fiscal Q2. To quickly summarize the previous report, the company beat handily on revenues and earnings, but issued a Q2 forecast that was a bit disappointing. That sent shares lower for a few days, but that pullback provided a great entry point and shares have rallied strongly since.
In terms of Q2 guidance, the company guided to revenue growth in a range of 14% to 18%. That was seen as a disappointment, because the Street was looking for 20.2% growth. Analysts have taken down their estimates since. Current estimates call for roughly $1.02 billion in quarterly revenues, or 15.8% year-over-year growth.
In terms of earnings per share guidance, the company gave a non-GAAP range of $0.70 to $0.75. That range was a bit better, as analysts had been looking for $0.73. Analysts have not changed their expectations for earnings, and they are still expecting $0.73. As a reminder, the earnings forecast is based on the share count going into January 31st. If the company bought any shares back after that date, that was not reflected in the guidance, but would certainly impact the earnings per share number for the quarter.
There are a couple of key items to watch in this report, outside of the actual numbers and fiscal Q3 and fiscal year guidance. The first important item to look at is the company's buyback. Green Mountain announced a $500 million buyback during 2012, and that buyback has been one of the reasons why shares have rallied from $15 to $60. As of the latest quarterly report, Green Mountain had spent $175 million to buy back stock. Their average share price was a little under $24, and we are now more than double that. It will be very interesting to see if they have purchased more shares after such a large rally, and to see what price they were able to do so at.
The second item is margins. Green Mountain bears were consistently arguing about two patent expirations in 2012 that would doom the company. We've seen a number of private label or generic K-cups pop up, and this call will help to determine how the company's products are doing. How the company was able to maintain its pricing will be critical. Also, Green Mountain's gross margins had been hurt by some manufacturing issues, and we'll see if those issues are now under control. In fiscal Q1, the company's net profit margin was barely over 8%. In such a low margin business, every dollar of costs is extremely important. I'll be curious to see if they can keep expenses in check.
The other key item will be balance sheet and cash flow numbers. Green Mountain has always been criticized for high inventory, so that's one item to watch. Also, Green Mountain has been celebrating and pointing to their free cash flow numbers for the year. I've been critical of them for this, because they've slashed their capital expenditures numbers. After a number of capex slashes last year, they slashed their fiscal year capex forecast for this year by $30 million at the Q1 report. Sure, cash flow is good, and if it's going to the buyback that's partially alright, but you have to invest in the business as well.
This is the company that allows you to make your own soda at home, along with a variety of other drinks. The company began trading in the US late in 2010, and ran from $25 to nearly $80 in mid 2011. However, the stock collapsed afterwards, as growth expectations were just too high and frankly, so was the stock. It took about a year for expectations to be completely readjusted, but now the stock is trading where it should be in my opinion. Despite beating results quite handily each quarter, the stock remained in the low-to-mid $30s for quite some time. We finally saw a breakout in late 2012, which has followed through into 2013.
I argued recently that SodaStream is here to stay, and I still believe that. You may remember that back in December 2012, I called for this company to have revenues of more than $525 million in 2013. At that point, the average revenue estimate for the year was $498 million, and the highest estimate on the Street was $524 million. After a great Q4 and solid guidance, I hiked my number to $550 million. That's slightly ahead of where Street estimates are now, but I haven't adjusted my number in a few months. I likely will do so after we get the first quarter numbers.
SodaStream only gives yearly guidance, and they guided to revenue growth of 25% for this year. The Street is currently looking for 25.5% growth. Their CEO recently stated that they've received orders beyond expectations, which is certainly a good sign. SodaStream provides net income guidance, but not earnings per share guidance. They expect adjusted net income to rise by 25% this year, and regular net income to increase by 18%. Adjusted net income does not include share-based compensation expenses. In 2012, the company had adjusted earnings per share of $2.39, with regular earnings per share of $2.09. With guidance of 18% growth in regular net income, the street is currently looking for $2.47 in earnings this year, or 18.18% growth.
Being that Q1 is a lower revenue quarter than others, analysts are expecting a little more growth in Q1 when SodaStream reports this week. Analysts are currently expecting a rise of 28.7% in revenues to $113.11 million. On an earnings per share front, analysts are looking for $0.54, compared to $0.48 in the year-ago period. SodaStream usually doesn't have trouble with the revenue numbers, but extra expenses have caused them to miss earnings occasionally. However, there have been slight disconnects between results and expectations, as the company went from reporting in Euros to Dollars last year. Also, the difference between adjusted and regular earnings per share has mixed up some people. For this quarter, we're looking at regular earnings.
The first thing I'll be looking at is obviously how they did in Q1. That might seem like a dumb statement, but SodaStream has recently embarked on a huge global marketing push. You may remember that they had a Super Bowl commercial, something they've never done before. They gained some extra media coverage after their primary commercial was pulled, because it was too harsh when looking at the "big soda companies." Even though the company was forced to use their backup ad, the Super Bowl is one of the most watched sporting events of the year. We'll see if the extra marketing expenses turned into sales, and hopefully earnings.
If they do report a huge Q1, guidance will certainly be key, and they better raise the full-year forecast in that case. With a stock that's run like this one has, expectations are high. It might take a guidance raise for this stock to continue higher, as just maintaining the forecast might be seen as a disappointment.
The other extremely important item to listen for on the conference call will be their growth strategy. Where do they go from here? There has certainly been speculation about SodaStream entering new markets, and we'll have to listen for details. The company also stated it was looking to enter United States drug and grocery stores in 2014, with some trial runs this year. That will be a great source of growth for them, and I'll be curious to hear if they have an update on that.
The other important item to watch is margins. The company's margins will depend on the product mix, the mix between consumables and soda makers. Also, SodaStream has had to sub-contract some of its production because of such high demand, which has hurt margins for the short-term and is expected to continue for the near future. They are working on expanding their own production facilities, but I think I'd trade a little on the margin side if demand is extremely spectacular.
Final Thoughts / Stock Movement After Earnings:
Green Mountain set a low bar for Q2, but this stock has certainly run since that after-earnings pullback. Green Mountain shares do have more upside potential, but we are already at a 52-week high. If the company has a solid Q2 and gives decent guidance, it is possible for shares to rally sharply. Short interest has come down from recent highs thanks to improved results and the buyback, but remains at nearly 20% of outstanding shares. If Green Mountain pulls back on a great report, it might be a good pullback to take advantage of. Those that did so last quarter have been rewarded nicely to this point.
SodaStream is also very close to its 52-week high, and like Green Mountain, there will be high expectations going in. SodaStream has been known for popping initially on earnings in the early morning, then falling back later in the day. So if the stock opens up say 10%-15% higher, you might want to wait a bit before jumping in. Short interest in this name is around 35%, which is extremely high and makes a short squeeze definitely possible. SodaStream is one of my favorite names out there currently, but don't overpay for it. I'm looking for a good report, and would potentially buy on any weakness.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.