Green Mountain, Is A Merger Brewing?

| About: Keurig Green (GMCR)

After Peet's Coffee & Tea, Inc. (NASDAQ:PEET) was bought Monday July 23, 2012, at a 29% premium by a German private equity firm, Caribou Coffee (NASDAQ:CBOU) jumped 4%. The share price of Starbucks (NASDAQ:SBUX), unlikely to be an acquisition target, was down on the day. Shares of Green Mountain (NASDAQ:GMCR), potentially a buyout target, were also down on the day and were slightly up the next day. That would not suggest there is current speculation that a buyout of Green Mountain is at hand.

Is Green Mountain a buyout target? Share prices of Green Mountain have declined this year, which did lead to speculation that it is an attractive buyout target. There has been speculation that Starbuck's, which has marketing deals with Green Mountain, would be a potential buyer. Is Green Mountain an attractive buyout target? With a PE ratio of 8.4 (Yahoo Finance) and forward PE of 5.7 (Yahoo Finance/Thomson Reuters), maybe. The market capitalization is $ 2.7 billion, so a deal would be substantially higher than the Peet's buyout. Second quarter sales were up 37% year over year, guidance for 2012 was for 45-50% net growth. Quite positive data on the heels of more than a 70% decline in Green Mountain share price over the last year. There are concerns about key patent expirations in 2014, allowing increased competition in the single coffee brewer space and there have been other problems with management and accounting. But Green Mountain estimates there are 10.8 to 12.2 million households using Keurig® Single Cup Brewers, but there are 90 million households with a coffee maker. There is plenty of growth potential remaining. Third-quarter financial results will be announced August 1, 2012, after the market closes. It may be worth considering buying Green Mountain shares before August 1, 2012, given the substantial sell-off over the year regardless of buyout speculation.

Admittedly a buyout by Starbucks, the leading provider of good coffee, makes some sense. Starbucks, coincidentally, has over $2 billion in cash according to Yahoo Finance. But Starbucks is going to sell its own single cup brewer, which led to a sale off of Green Mountain shares in March of 2012.

Is Green Mountain a buy, regardless of buyout speculation? Green Mountain is still a growth stock. As noted above, sales were up 37% year over year, guidance for 2012 was for 45-50% net growth. If you like coffee, making fresh coffee from single cup brewers makes a lot of sense. Hot plates that keep coffee warm tend to burn the coffee. Microwaving cold coffee isn't that great either. And the newest data suggests drinking coffee is good for you, so fresh ought to be even better. There is reason to project that sales of single cup brewers will remain robust.

Green Mountain has sold off more than 70% in the last year. The trailing PE ratio is 8.6 and price-to-sales ratio is 0.8. A growth stock with a price-to-sales ratio under 1, what is wrong with this story? Admittedly, there have been accounting problems and management changes, but this is a scenario for a classic turn around. Yes, the expiration of patents looms on the horizon, but sales were up 37% year over year. The trailing PE is 8.4! Will earnings really fall off a cliff? The question really isn't whether to buy Green Mountain shares, the question is whether the share price has reached a bottom. It is near.

Although a buyout of Green Mountain by Starbucks makes sense, it is speculation. But Green Mountain is worth acquiring on fundamental valuation and growth prospects. Perhaps bids under market to accumulate Green Mountain on volatility is the right call.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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