Seeking Alpha
Profile| Send Message| ()  

I wrote an article after Green Mountain Coffee Roasters' (GMCR) last quarter earnings recommending buying the stock after its steep correction. My main arguments were the low valuations of GMCR and the continued strength in demand at consumer level for the company’s product. The stock closed at $40 on the first day after reporting. It has recovered ~25% since and is now trading around $50 despite of the steep market correction since then.

If we look at current valuation of GMCR, it is trading at 17.9x CY 2012e EPS. This is in line with the average forward PE multiple of its peer group despite of significantly higher growth rate.

Trailing PE

Current Year PE

Forward PE

JVA

19.11

13.56

9.56

PEET

41.28

36.60

30.84

SBUX

26.87

22.32

18.48

SJM

15.18

14.52

13.16

DNKN

45.20

27.38

20.88

KFT

16.99

15.12

13.57

Average

27.44

21.58

17.75

I believe GMCR’s share will find strong support at these levels as any further slide would mean them trading at discount vs. their significantly low growth peers which is not fundamentally justified even if we go by Einhorn’s thesis (pdf).

On the upside, it will require some more clarity especially on the current quarter trends for GMCR shares to see significant upside. Since there is no major conference/presentation by GMCR scheduled in December, bulls might have to wait a little longer till next quarter results to see a significant upside. Meanwhile, a covered call strategy might be the best low risk way to trade the shares.

The Strategy: Traders can buy the shares of GMCR at current price (Friday close) of $49.66 and at the same time sell December, 2011 call options at current price of $4.35. The strategy will have the following risk reward profile:

Breakeven Price: $45.31 (ex-commissions)

Maximum Profit: $3.69 per lot or 7.43% in next 3 weeks

Losses: In the worst case, if stock happens to close below $45.31 on Dec 16th traders will incur losses similar to what if they would have purchased stock at $45.31; an 8.76% downside protection

Source: A Low Risk Trade In Green Mountain Coffee Shares