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We have heard from multiple sources of a new concern that may plague Green Mountain Coffee Roasters (GMCR) - the popular Keurig coffee makers may attract ants. Still, our survey showed 100% of the affected consumers are unwilling to give up their Keurigs, so perhaps investors should be more concerned about the Barron's article over the weekend that patent expirations are bringing new competitors into the market place, eating up Green Mountain Coffee Roasters' market share and margin. Barron's says these pressures could take 20% out of Green Mountain's share price.

Of course, these concerns aren't new and the demise of Green Mountain has been talked about for nearly two years now. It was in October 2011 when David Einhorn announced he was shorting the stock while it was around $100 per share and in mid-October of 2011, Forbes published an article about the very same issues raised in Barron's over the weekend. At that time, the consensus earnings estimate for fiscal year 2013 was $3.87 per share. By the time the company reported its first results after the patents expired last year, estimates for fiscal 2013 had been slashed to $2.49 per share. During that period, short interest increased from about 25 million shares to over 50 million share as investors expected the company to no longer be able to keep up. The stock traded down to below $20 too.

However, a funny thing has happened since then - the company continued to grow. In fact, using Barron's own numbers, the market for single-serve cups of coffee has grown from 23% of the ground coffee market to a 33% market share in just the past year (plus a couple of months). Barron's also points out though that Green Mountain has lost market share of the single-serve cups to the likes of Folgers, the majority leader of ground coffee sales, and Green Mountain now only has 43% of the single-serve cup sales vs. 52% a little over a year ago.

Of course you can use statistics to prove any point you want to make and we would like to use those same statistics to prove another point. 52% of 23% equals 12%, while 43% of 33% equals 14%. In other words, in the great big picture of the big market of total ground coffee sales, Green Mountain Coffee Roasters' market share has increased from 12% to 14% over the past 14 months. In addition, margins on the single-serve coffee are significantly higher than traditional ground coffee, which makes Green Mountain still a growth story.

As a result, the consensus estimate for fiscal 2013 has climbed back up to $3.16 per share and if analysts' checks are accurate for the recent quarter and hold true another quarter, then Green Mountain Coffee Roasters is likely to earn that $3.87 per share that was estimated back when Einhorn announced his position and there are still 30 million shares short the stock - or almost 20% of the float.

That brings us to the analysts' checks. Barron's own numbers show total market share gains during the quarter (or at least through June 8), but Damien Couvalin at Goldman Sachs, using similar numbers, pointed out that K-Cup growth accelerated to 15.7% during the quarter. That only gives us unit sales, rather than revenue growth, but Green Mountain's guidance was for revenue growth of 11% to 15%. The consensus revenue estimate is $981.9 million, or 13.0% growth, so if Goldman's numbers are right, that means there is upside potential to revenue estimates if pricing can hold up and the revenue whispers are north of $1.0 billion.

That is part of the bear case though - that pricing will deteriorate … and it is the lower pricing that helped the Green Mountain's sales, as unlicensed K-cup market share appears to be flat for the quarter according to William Chappell at SunTrust Robinson Humphrey. That's where Alton Stump's research at Longbow Research comes in. He says that their data shows Green Mountain's pricing returned to normal levels for the first time since October. This is at least partially with its branding with Starbucks (SBUX), Snapple (DPS), and others, but it also means a stabilization of margins. This goes against the bear case for the stock and it adds to the upside potential to revenue.

The company's guidance was for earnings of $0.71 to $0.78 per share, but to back into that, assuming non-operating expenses see similar increases as last quarter, you have to factor in a sequential decline in margins during the quarter. If margins remain the same it means three to four cents upside to the company's guidance. However, there are still additional factors that can boost earnings.

For one, according to Bryan Spillane at Bank of America-Merrill Lynch, 13.5% of Green Mountain's input costs are due to the price of coffee, but coffee prices have fallen to a three-year low, which should also put upside potential to the company's guidance. Throw in some share repurchases, and we have an Earnings Whisper ® number of $0.85 per share. The consensus earnings estimate is $0.77 per share.

EarningsWhispers chart for GMCR
(Click to enlarge)

The expected beat should push forward estimates higher and that supports the trend in the stock price where we've now had four touches on the trend line since last November, excluding a handful of intraday declines below the line in July where buyers stepped in on an increase in volume. Those moves also put the support created by last quarter's gap higher into play where it successful held. With that, we made the stock an Earnings Whisper ® Play on Friday, August 2, 2013 for a long trade ahead of its earnings release scheduled for after the market closes on Wednesday, August 7, 2013 with a conference call at 5:00 PM ET.

Source: Green Mountain Coffee Is Expected To Report Strong Sales, Stable Prices And Lower Input Costs