Almost a year ago Greenlight Capital took the position that Green Mountain Coffee Roasters (GMCR) was an overvalued company eventhough it had already lost over 70% of its value in a long-term decline. Yet this year has been a great year for the company as it has doubled in value and it appears that board members are still buying the stock. I have been taught when "insiders" by the stock, it is because they are confident it's going to keep moving up. Presently the stock is trading at 83.78--is it still good buy?
Let's take a look at Green Mountain Coffee Roaster's "year end" numbers for 2013. (The company has a September year-end)
- Revenue increased almost 15% for the year, on a year over year basis
- Earnings also increased by over 30%
- The company added over $250 million to its cash position
- Cash flow has been solid and consistent over the year
As an investor, I guess I would have to ask myself this question: Did I miss the timing on this investment? Has it gone up too much, or can I still invest in it without seeing the stock crashingdown on me?
Since the company has done so well I am sure investor sentiment is also positive but the company is close to 30x trailing earnings, so the price seems a bit high. It is extremely difficult to add margin increases like the company has, and eventually the company's growth rate and increasing sales would have to cross paths. Bottom line- it would be hard to continue to see growth like the company has.
With a (P/E) of 23 based upon analyst expectations of EPS for next year, the company looks a bit pricey. I believe it could sustain its EPS growth if it used its cash surplus to generate more buybacks. One of the problems I see that I'm sure other investors would also note is the generous valuation of the stock. The company would have to sustain high profit growth and consistent rising net margins. I just don't know if this is doable. With increasing competition and the likelihood that we may see shrinking margins, the company looks a little too rich for my personal taste.
Alliances for Continued Growth
Without getting into too much detail, I would like to point out that the company is not sitting on its success, but continues to build alliances to expand its revenue base. It is no secret that Green Mountain Coffee already works with Starbucks (SBUX), combining the K-cup and the Keurig brewing system that it owns. The company extended their partnership for another five years. Campbell's Soup (CPB) in a K-cup will now be added to the Keurig brewer system to offer "mini meals" which are growing in popularity here in the United States. Cinnabon, a very popular national bakery, will offer K-cup coffee packs in the brewing system by early 2014. So you see, the company is building alliances to expand its revenue base.
Possible Market Share Loss
In 2012, the company had to face expirations of its patents on the covered brewing system. Would this cause Green Mountain to surrender market share to cheaper private-label copycats? I will remind readers that OTR Global reported from its research of 7,000 coffee stores that K-cups appear to be losing market share to private competitors.
I read an article recently by Jessi Eisinger who wrote about the recent discrepancy in sales for the third quarter. This is what he wrote:
"Roughly 90 percent of Green Mountain's K-Cup sales are in the United States, based on company disclosures. Using the company's math, that would add up to 5.6 billion in K-Cup sales so far this year. IRI, however, has tracked only about 2.6 billion K-Cup sales for the first nine months of the year, according to an analysis I was furnished with. If, as Mr. Kelley says, that 2.6 billion represents 55 percent of the total, then 100 percent would be about 4.7 billion. That's a far cry from 5.6 billion. There seems to be a gap in the United States of about 900 million K-Cups."
He was told that IRI gave him numbers that were too low. The company said the IRI numbers really should be about 2.7 billion. That would make total sales in the United States of about 9 billion and Mr. Eisinger sees a 700 million K-cup shortfall in sales of what the company posted.
It's no secret that the SEC continues to investigate Green Mountain's accounting/sales practices, even as I write this article. The market reacted to this already and now we need to see if the company still has legs to its year-long bullish run. The company may continue to have some momentum for a while, but I think I'll sit this one out.
Editor's Note: All the data came from Green Mountain Coffee Financial Reports