Seeking Alpha
Profile| Send Message| ()  

Ever since Einhorn announced his short of Green Mountain Coffee Roasters (GMCR), the stock has gotten a pretty bad rap. Despite falling over 80% since September 2011, shorts made up 25% of the float as of mid-July. For the reasons I'm about to outline below, at the current price, GMCR might be a good pickup.

My goal here isn't to analyze every aspect of GMCR's business, which has already been publicly picked apart by hundreds of investors. The best recent analysis I can find is Seth Golden's very thorough article Green Mountain Coffee Roasters: The Afterthoughts. The important points are:

  • Cash flow is becoming positive
  • Partnerships with Starbucks and Folgers, new product launches, and brand loyalty will mitigate effects of patent expiry
  • EPS growth will continue at a moderate rate

Seth's ultimate conclusion:

My overall hypothesis for GMCR is that the shorts had it right, but only for 2012.

Seth is right. A year ago, GMCR was little more than another overpriced momentum play. But in 11 months, GMCR has experienced severe multiple compression. TTM P/E has fallen from over 80 to around 10, which means GMCR is now solidly in "value" territory.

GMCR PE Ratio Chart

GMCR PE Ratio data by YCharts

GMCR looks even cheaper when you consider that unlike most "value" stocks, the business is not yet "mature." It has penetrated most of the marketplace, but still has room for several years of good growth. According to data gathered by Thomson Reuters as of August 6, 2012, the current mean EPS estimate for 2012 is $2.24. The current mean estimate for 2013 is $2.61, meaning analysts estimate 16% year-on-year growth. It doesn't take any difficult math to see that GMCR's PEG is now below 1. Assuming GMCR maintains a TTM P/E of 11, even if it misses analyst estimates for 2013 and reports earnings of $2.45, it would be valued at $26.95 at the end of the period. That's 13% upside, assuming the worst-case scenario (below-consensus growth and flat multiple). If GMCR meets consensus, reports $2.61 in EPS, and the multiple expands to a still-very-reasonable 12, the stock would be worth $31.32, representing 36% upside to the current price.

This discussion, of course, ignores the fact that 25% of the float is shorted, which could lead to a very nice short squeeze propelling GMCR beyond either of those price targets in a very short period of time. One more significantly above-consensus report, and GMCR could shoot upwards.

Based on this analysis, I have initiated a trading position in GMCR, and have set up a limit order to exit the position whenever GMCR crosses the $25 threshold. This sell limit is roughly 8.5% above current prices.

In 11 months, Green Mountain's stock has completely reclassified itself. Management has shown positive trends, and based on the already-low valuation and sky-high short ratio, I believe GMCR offers a good risk/reward opportunity over the next few months to a year.

(Regular readers, please note that I'm recommending GMCR as a short-term play, not as a buy-and-hold type stock.)

Source: Green Mountain Coffee Roasters: Momo Trap To Deep Value