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Green Mountain Coffee Roasters (NASDAQ:GMCR) has been one of the high flyers for the processed and packaged Goods sector with a share price currently sitting at around $51. As, shares have risen to an all-time high of $115.98 on September 20th. Since that time the price of the stock has declined by 57%. This is based upon concerns that shares have become overvalued. Since November 15th it has been in a free fall, with the company reporting disappointing earnings per share of $.47 cents (for the third quarter of 2011) in comparison with analysts’ consensus of $.48 cents. While, their sales figures were $711.9 million, which is below the $761.4 million that Wall Street was looking for. These disappointing numbers, led to decreases of 49% in share prices since Mid-November. As a result, both investors and traders are divided as to if this is a good long term buy or a possible shorting opportunity.

The Changing Trends

When you look at the stock, it is clear that there were changes in the trend with it becoming bearish. This occurred on October 19th, when there was a decline in share prices from $84.78 to $69.50 (with a close of $69.80). At the time, the 200 day moving average was sitting at $72.73. This is significant, because the close below the 200 day moving average is an indication that the stock has begun a downward trend. Since that time, shares have fallen to $34.06, which has caused some investors to believe that the company is offering an outstanding long term valuation based on the recent sell off. This has caused many buyers to begin aggressively purchasing the stock with shares rising from a low of $34.06 on November 11 to around $51 today. These moves are an indication that the stock is going through what is known as a short term bull rally. The price will more than likely top out somewhere before it reaches $70 and will then test the previous lows from a prior decline. This is a sign that Green Mountain Coffee has the potential for more volatility in its earnings.

Evidence of this can be seen by comparing the performance of top competitors and the fundamentals of Green Mountain. Inside the sector, there are three major competitors that the company is facing; these include: Farmer Brother (NASDAQ:FARM), Peet’s Coffee (NASDAQ:PEET) and Starbucks (NASDAQ:SBUX). When it comes to the performance of Starbucks and Peet’s Coffee, they have been seeing consistent increases in the prices of their stocks. As both companies, are trading near the 52 week highs and they are above their 200 day moving averages. While Famer Brothers, has been well below the 200 day moving average and has been testing its annual low. The divergence is an indication that some firms are beginning to see pressure on their earnings, profit margins and costs. This has been causing stock prices of the different companies in the sector to vary.

A good example of this can be seen by looking at the valuation of Green Mountain Coffee Roasters in comparison with its top competitors. As all of the different firms in the sector, have been experiencing increasing amounts of quarterly revenues and net income. Yet, when you look at other fundamental indicators (such as the PE ratio), they are indicating that prices have become overvalued. The below table is comparing the growth and valuations of the different companies in the sector with each other.

A Fundamental Comparison of the Top Coffee Producers

Category

GMCR

FARM

PEET

SBUX

Industry

Revenue Growth

98.80%

11.50%

13.70%

6.80%

11.40%

Revenues

$2.65 billion

$476.40 million

$361.92 million

$11.70 billion

$744.07 million

Gross Margins

34.13%

31.20%

20.65%

57.70%

30.88%

Operating Margins

14.32%

-11.17%

9.03%

13.27%

8.42%

EPS

$1.31

$-3.41

$1.38

$1.62

$.96

Net Income

$199.50 million

$-51.61 million

$18.57 million

$1.25 billion

NA

PE Ratio

39.26

NA

40.76

25.99

16.44

These figures are important because they are showing how the entire industry has been experiencing tremendous amounts of growth in the past. However, there are a number of issues that are impacting the sector (i.e. high PE ratios, stock prices and lower earnings per share). This is an indication that the entire industry is starting to see slower growth. Once this occurs, it is difficult for these companies to continue to provide the same kind of consistent returns as in the past. Over the medium term, this means that there will be select companies that will be stronger in comparison with other firms. For Green Mountain, any kind of slowdown will cause the amounts of volatility to increase. Therefore, investors should be looking to short Green Mountain Coffee. This is because of the stock’s poor fundamentals and technicals.

However, in the long term it is expected that demand for gourmet coffee related products will continue to rise. This is because many emerging economies (such as: India and China) have begun to consume more of these kinds of beverages. Evidence of this can be seen with an announcement from Starbucks to open 1000 new stores in China (despite controlling 70% of the market). While Green Mountain Coffee, is mainly focused on North American segments. This is problematic, because it means that Green Mountain could see more volatile earnings by ignoring some of the fastest growing economies.

As a result, a divergence is occurring inside the sector, with Starbucks focused on those regions that will contribute dramatically to their long term growth. While companies such as Green Mountain Coffee, are focused on traditional markets. This means that their earnings will face greater amounts of pressure from struggling demand. Once this occurs, there will be tremendous amounts of selling in the stock. These factors are important, because they are showing how the company is an ideal candidate for shorting. Until they begin to focus on other areas that will add to their long term growth, the company will continue to face pricing pressures from declining demand in the North American market.

Source: Green Mountain Coffee: Still Plenty Of Room To Plunge