Green Mountain Coffee: Is Flurry of Deals Hinting at Desperation?

 |  Includes: CAG, GMCR, SBUX
by: Jason Merriam
Shares of Green Mountain Coffee Roasters (NASDAQ:GMCR) have held up remarkably well following the announced “strategic” agreement with Starbucks (NASDAQ:SBUX) back in early March.
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GMCR: Good run, but now what?Click to enlarge
In fact, GMCR has been busy signing other deals since reporting Q1 2011 earnings last Feb. 22. The latest deal with ConAgra (NYSE:CAG) will see Swiss Miss Hot Cocoa in K-Cup Portion Packs for the Keurig Single-Cup Brewer.
The Swiss Miss deal looks to benefit CAG and, as we wrote previously, its management team has done a tremendous job in leveraging its core brands. But it begs the question: Why mess with the simplicity of the Swiss Miss brand and potentially slice margins when unit costs and/or royalty expenses to make that delicious single-brew cocoa bump up a notch? Besides, why gum up the Keurig with modified whey and hydrogenated coconut oil?
Ironically, this rash of pending deals has helped to buoy GMCR shares, but there’s been no disclosure of financial terms regarding these announcements. Unless there are up-front cash components to any of these deals, we don’t see any potential improvement to GMCR’s liquidity issues.
More importantly, its balance sheet is a mess, which will in our view necessitate something short of a miracle to keep the engine running. The company is set to report Q2 earnings on May 3.
Admittedly, we thought the stock was overpriced at $40, but that didn’t stop shares from rising another 25 points. However, it does not change the fact that even with all these pending deals, GMCR stock remains absurdly overvalued.
Think of GMCR as a big car heading for a brick wall, and everyone’s arguing with each other over where they’re going to sit. If you’ve been in the front seat, it’s been a fun trip so far and you have likely made significant profits. The coffee buzz has been stimulating to the longs thus far, but it couldn’t hurt to lock-in some of those caffeinated profits or at least move to the back seat before reaching the brick wall.
Regardless of how tasty or marvelous GMCR’s coffees and single-serve format might be, there is absolutely no reason not to expect a workaround to the Keurig patent. This isn’t digital technology or optics or some other revolutionary productivity enabling schema. It’s coffee.
Disclosure: I am long CAG