GMCR: Is Now Time to Buy?
Green Mountain Coffee Roasters (GMCR) has traded higher by 20% over the last five days, and investors are now beginning to debate whether or not a bottom has been found and if now is a good time to buy. At some point in time a beaten down stock will reach a bottom. The question is whether or not it's a temporary bottom that proves to be a good investment for shareholders. The encouraging fact is that GMCR is a growing company, however with so many questions it is hard to determine whether this stock can continue its rally, seeing as how the market is event driven, and its future is uncertain.
The first step to determining the future trend of a stock is to look at its fundamentals: And by all measures GMCR has strong fundamental growth in a very large market. The stock trades with a market cap of $3.80 billion and a P/E ratio that's under 12.0. For its upcoming quarter the company is expected to post revenue of $871.63 million, a 21% year-over-year gain, and an EPS of $0.50, which would be $0.01 more than last year. GMCR has a fairly strong balance sheet, with little debt, and retained earnings of $609 million, with a current ratio of 2.36. However, the question moving forward isn't the company's previous earnings growth, or its current fundamentals, but rather increased competition, losing its market share, and a decline in margins.
One of the first metrics I look at when researching a company is its operating cash flow, which is the money from the operations of the company. GMCR has been near even the last two years in cash from operating activities, and has managed to create all of its positive cash flow from financing activities. As an investor this creates fear, because we already know that it will most likely have to price its K-Cups more competitive due to recent reports that Kroger (KR) and others are planning to sell generic K-cups for what most believe will be a much lower price. Kroger is one of GMCR's largest vendors, and if Wal-Mart (WMT) were to follow the same path with its generic brands then it could be disastrous for this company. Not to mention the questions that surround Starbucks' (SBUX) future plans in the single serve space, which could further impact GMCR.
The good news for GMCR is that it's priced for the worst-case scenario. Despite its recent rally the stock is still trading with a one-year loss of nearly 75%, as investors expect GMCR to lose significant market share in the near future. My largest concern is the company's margins. It recorded a profit margin of 9.48% over the last 12 months, but if supply grows larger, competition increases, and generics force lower prices, then GMCR's net income could decline much faster than its revenue. In my opinion this is a likely scenario. I don't think it makes sense that companies such as Kroger and Wal-Mart wouldn't enter the space, as K-cups do provide much better margins then either WMT or KR currently record on a yearly basis.
I think investors should be very careful if investing in GMCR. The stock is priced very cheap according to current fundamentals, but investors must remember that future earnings could decline, and guidance could be weak, in the upcoming quarters. Over the last five years GMCR has built a company where it has experienced great success, due to the single-serve space. But now that other companies are entering the space, you can rest assured that margins and operating cash flow will decline, and if financing is problematic then net income will push the stock lower.
As for its recent performance, I think it is just as dangerous. The company hasn't released any news to validate its rally. Therefore, its performance is nothing more than a classic example of how crazy this market trades. In fact during the same period Starbucks has traded lower by nearly 5.50%. The bottom line is to be careful with this stock. Be careful short and long-term, as the future is uncertain, and conventional wisdom suggests that the immediate future will most likely get worse before getting better.