Green Mountain Coffee Roasters: Short Sellers Get Squeezed As Company Guides Into 2013

Aug. 6.12 | About: Keurig Green (GMCR)

Shares of specialty coffee maker Green Mountain Coffee Roasters (GMCR) rallied over 20% in the past week after the company published its third quarter results.

Third Quarter Results

On Thursday, Green Mountain Coffee Roasters reported third quarter net sales of $869.2 million, up 21% compared to 2011. Gross margins contracted by 190 basis points to 34.9% as a result of lower than planned production levels, which impacted margins by 320 basis points. The positive impact from higher realized prices, which boosted margins by 250 basis points, was offset by higher obsolescence.

GAAP net income rose 30% to $73.3 million, with diluted earnings per share coming in at $0.46.

CEO Lawrence J. Blanford commented on the results, "our third quarter results demonstrate continued strength and solid fundamentals, particularly in light of the robust comparable quarter we reported in the year ago period."

The Board of Green Mountain authorized the company to repurchase up to $500 million of its common shares in the next two years, financed by cash at hand and the existing credit facility.

Segmental Information

Single-serve packs continue to drive Green Mountain's revenues. Revenues rose 31% to $638.0 million. Prices rose 3%, while volumes were up 28% compared to 2011. Brewers & Accessories reported a 32% increase in revenues to $139.1 million as the company sold 1.4 million Single Cup Brewers. Other products and royalties generated $92.1 million in revenues, down 27% on the year as a result of the sale of Filterfresh in 2011.

Outlook

Blanford further commented on the longer term outlook of the business:

"As we become larger, our sales growth trajectory will understandably moderate from hyper-growth to a level more in-line with other successful growth business. Based upon our current analysis of business fundamentals and the single-serve opportunity, we believe we will deliver annual sales in the range of 15% to 20% with annual earnings growth in the mid-teens over the longer term."

For the fourth quarter of 2012, the company guides for net sales of $889.9 million to $925.5 million, up 25-30% compared to 2011. Non-GAAP earnings per share are expected to come in between $0.45-$0.50, compared to $0.52 in the second quarter.

For the full year of its fiscal 2013, the company expects sales growth of 15-20%. Non-GAAP earnings per share are expected to come in at $2.55-$2.65 per share, with GAAP earnings coming $0.18 cents below that range.

Valuation

Green Mountain Coffee Roasters ended its third quarter with $149.1 million in cash and equivalents. It has $409.1 million in short and long term debt outstanding for a net debt position of $260 million. Notable was the 60% increase in inventories to $667 million, causing some nervousness among investors. Green Mountain says the inventory build up is necessary to ensure availability for the holiday season.

For the full year of 2012, sales are expected to come in between $3.79 and $3.84 billion. Non-GAAP earnings per share are guided at $2.21-$2.26 per share, with GAAP earnings coming in at $2.01-$2.06 per diluted share.

Based on Friday's closing price of $21.63 per share, the market values the firm at $3.4 billion, or 0.9 times annual revenues and 11 times GAAP net income. This valuation compares to a revenue multiple of 2.8 times for Starbucks (SBUX) and 2.7 times for Peet's Coffee (PEET). Both competitors trade at 25 and 69 times trailing annual earnings, respectively.

Currently, Green Mountain Coffee Roasters does not pay a dividend.

Investment Thesis

Shares of Green Mountain Coffee Roasters have had a rough time over the past year. Shares peaked at $116 per share in September 2011 and have fallen towards $45 by the end of the year. In 2012, shares have fallen another 50%, trading around $21.63 at the moment.

Shares have fallen over 80% over the past year as a storm of bad news hit the company. Well-known hedge fund manager David Einhorn, who manages Greenlight Capital, criticized the company in October 2011. He said that patent losses on K-cups wear on investor confidence and prices are falling.

Furthermore, founder Stiller was removed as Chairman of the board after he sold stock to meet a margin call, amidst falling a falling share price. To make things worse, the company lowered its third quarter and fully year 2012 forecasts, well below analysts consensus. The company faces increased competition as K-cups patents are expiring in September, triggering more competition from chains such as Safeway (SWY) and Kroger Co (KR).

This week's rally is most likely based on the fact that the company gave a strong outlook for its full year of 2013. Shares rallied from $18 to $24 per share on Thursday as short-sellers were getting squeezed on their positions. Furthermore, some investors were relieved with improved "visibility" into 2013.

With shares having fallen over 85% over the last year, shares offer little upside for the short sellers. With fundamentals stabilizing, the company is attracting long term investors, despite the uncertainties regarding the viability of its long term business outlook.

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