When I think of Green Mountain Coffee Roasters (NASDAQ:GMCR), I’m reminded of Hewlett Packard (NYSE:HPQ) printers. You might ask, “What does coffee have to do with printers?” The answer is -- recurring revenue and LOTS of it. HP has made out handsomely over the years from selling replacement ink cartridges for its printers. There’s not many alternatives to purchasing their replacement cartridges, refill maybe, and that’s about it. Printer manufacturers practically give away their printers in hopes of making up the difference on recurring purchases of printer ink cartridges.
Green Mountain Coffee Roasters is using a similar business model, but instead of ink, they’re selling brewing systems and the cartridges for the brewing systems, coffee, tea, hot chocolate, etc. Just like HP, they’re making lots of recurring revenue after the sale of a brewing system from the sale of the beverage cartridges. And, like HP, if you want to continue to use their brewing system, you have to keep purchasing the cartridges.
The company has been on a real growth spurt over the last year with a 127% increase in revenue. The company is seeing strong consumer adoption of its brewing systems. The company is working on cartridges for new occasions and looking to expand beyond coffee, tea, etc. The interest in the brewing systems had broadened with the addition of Folgers (NYSE:SJM), Dunkin’ Donuts (NASDAQ:DNKN) and Starbucks (NASDAQ:SBUX). The company is also working with ConAgra (NYSE:CAG) for introduction of Swiss Miss brand beverages. The company is also developing a new espresso-based system with Lavazza. A new brewing system is in consumer testing and will begin developing cartridges for the platform in fiscal 2012.
The company’s expansion into Canada via the acquisition of Van Houtte is doing well, representing 16% of the company’s sales.
On a potentially note, the company recently issued shares of stock for strengthening the balance sheet. Typically, when a company issues shares of stock it considers its shares as being overpriced, so the price of GMCR may be peaking. Additionally, the company’s P/E is very expensive at 87.
Green Mountain’s stock price has recently retreated, as is the case with most stocks of late, and is near its previous support level around $85, as shown in the chart below:
The next support level is around $75 dollars, so if the company has some bad news, the stock could take a big drop to around $75.
So what’s a person seeking to invest in Green Mountain Coffee Roasters to do?
One possible solution is to enter a collar position for GMCR. A collar is a stock option strategy where a call option is sold against the stock and the proceeds from selling the call option are used to purchase a put option for protection or insurance.
As an example, using our search engine, a collar position for GMCR for October expiration was found with a potential return of 4.2%, a maximum loss of 10.7% and realization of the potential return in only 18 days.
The call option for the collar is an October 87.5 and the put option is an October 75. As long as the price of GMCR is greater than the strike price of the call option, $87.5, at expiration, the position returns 4.2%. And if the GMCR stock drops in price, the maximum loss is 10.7%.
A profit/loss for the collar position is shown below:
As an added bonus, the call option can be rolled for more potential return as the price of GMCR increases or decreases.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.