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by John Elam

It’s not just in the fields anymore that the coffee industry experiences good and bad seasons, and investors appear to be reminding the executives of this very fact. If investors learned anything from the 2008 recession, it might have been that there is always room to fall. That being said, the recent turbulence for Green Mountain Coffee Roasters Inc. (GMCR) begs the question of whether the market is accurately reacting to new information, or is GMCR’s value being whipped around by headlines and broader market projections.

In its recent publication of its fourth quarter fiscal 2011 and fiscal 2011 performance highlights, GMCR focused on substantial increases in net sales, earnings per share, operating income, and net income. Fourth quarter over fourth quarter last year net sales are up 91% to $711.9 million and Year over year sales are up 95% to $2,650.9 million. While this data is beyond slightly significant, they are just one of several signs of the strength of GMCR. Beyond net sales, earnings per share over the fourth quarter exploded 96% and GAAP earnings per share grew even greater at 135% over the same period versus the fourth quarter of last year.

Looking at the fiscal year over year earnings per share, we see a growth of 113% and Generally Accepted Accounting Principles (GAAP) earnings per share growth of 126%. Operating income and net income over the same periods experienced even greater growths, a possible indication that the firm was prepared for this growth, and properly managed its expansion. GAAP and non GAAP operating income for the fiscal year experienced growth of 166% and 148% respectively, reaching $368.9 million and $428.7 million as well. Finally, GAAP net income for the fiscal year more than doubled, experiencing a growth of 151% to $199.5 million, and non GAAP net income reached $248.9 million with a 135% growth.

While these figures appear to be solid indications of substantial growth, it is important to understand the broader corporate environment from which they stem. When considering the rapid growth of GMCR it must be noted that the majority (67%) of growth during the period was a result of a significant increase in K-Cup portion packs being sold. This is important as it is likely an indication of positive response by the clients towards the product, and investors should not ignore the source of this revenue.

Furthermore, during the fiscal year of 2011 GMCR experience a 59% growth in Brewers and Accessories. This figure includes the sale of 5.9 million Keurig Single Cup Brewers, opening the door for more K-Cup sales. In particular, Dunkin' Donuts (DNKN) is partially dependent on GMCR now that it has Dunkin' K-Cups. Another figure to note is the approximately 65% increase in green coffee costs, an increase that not only did not deter sales, that occurred during a substantial increase in earnings. Finally, the large drop off in net sales from royalties is not significant as might be perceived as it is largely a result of the GMCR’s acquisition of the firms Timothy’s, Diedrich and Van Houtte, likely resulting in this revenue now entering the firm through different channels including brewers and accessories and other products.

While GMCR continues to have a relatively high price to earnings ratio, the firm demonstration of strong growth and expansion-- without the addition of undue or excessive debt-- keeps it an interesting player in the consumer market. While sustained growth at these levels is likely a bit farfetched, continued growth, primarily demonstrated by continued sales of brewing systems, is more than just a good sign. As mentioned earlier, with much of the revenue coming from K-Cup portion packs, the sales of additional units provides an even greater market for future sales.

The firm continued to show poise and strength during-- but especially after-- the split of Fair Trade USA and Fair Trade International, two firms that work to improve the quality of life for agricultural workers around the world. These organizations have recently severed affiliations due to differences in how to achieve their end goals, even as those remain very similar. As a portion of the value that GMCR adds comes through the use and production of Fair Trade certified coffee, debates and disasters amongst the certifiers have the potential to cause significant problems for the firm. But as of now GMCR seems to have successfully navigated that storm. While a relatively young firm, especially in light of its recent and dramatic growth, this firm shows not only sound fundamentals, but appears to be led by competent and future looking executives; a sign that the recent drop off in value may have fallen too far.

Looking at the industry broadly we see investors responding in substantially different manners to GMCR’s competitors. Investors seem to be confident in Starbucks Corporation (SBUX) as the ticker price has spent the last two weeks rising and then dropping below its 52 week high. While the recent fluctuations are not great for day to day investors, long term investors have seen substantial gains year over year since the beginning of 2009.

On the other end of the spectrum, Farmers Brother Company (FARM) is trading at $6.38 on the very low end of its 52 week range of $4.43 to $18.93. While this value has increased in the past few months, it has consistently remained below $6.00 since august, an indication that investors are comfortable with its current pricing. Another competitor, Pete’s Coffee and Tea Inc., (PEET) sustained fluctuation but consistent gains through the end of October, but has fallen off dramatically since then. This fall off is particularly interesting given that on November 1st PEET reported net revenue growth for year over year topped 14% for the quarter.

Source: What To Make Of Green Mountain's Whipsaw Price Action