Long Starbucks On Verismo Brewers, Short Green Mountain Coffee On Competitive Threats

| About: Starbucks Corporation (SBUX)

In our previous article, we discussed Starbucks' (NASDAQ:SBUX) latest offering (Verismo) and its impact on Green Mountain Coffee Roasters (NASDAQ:GMCR). GMCR's shares had gone from $30 to $26, on news of the Verismo launch, even though, the news was not a surprise. Since then, GMCR has gone down a further 16% to $22.53, as investors continue to fear for the company's prospects amidst more competitors entering GMCR's business areas. This article is an update on our investment thesis of going long on SBUX and short on GMCR.

According to Bloomberg's Businessweek article, Starbucks has sold out some of its Verismo brewers. The brewers are yet to be available at the company's stores (will be available from 16 October) and at retailers other than Williams-Sonoma (NYSE:WSM). SBUX's spokeswoman has said that the company understands the demand for the brewers, and will have enough Verismo inventory on hand to cater to holiday season customers. The brewer market is worth $8 billion worldwide.

GMCR derives 73% of its revenues from single serve packs, according to Q3 results. With the expiration of K-Cup patents, it is open to competition from the likes of Kroger (NYSE:KR), as mentioned in our previous article. This might be a bigger cause for concern for GMCR than brewers, which accounted for 16% of Q3 revenues.

Some of the recent fall in GMCR might also be due to David Einhorn's negative comments about the company at the Value Investing Congress. Einhorn called the company "very exposed" and with "poor spending discipline".

GMCR is not sitting on the sidelines either, and intends to deal with the competition from SBUX. The company cut its price for the Keurig Vue V700 from $249.99-to-$229.99. Another simpler model, the V600, has been launched at a discounted price of $209.99. SBUX's basic version comes with a price tag of $199. The launch in early September of wellness drinks was aimed at attracting the health conscious customer. There is also a deal with Dr Pepper Snapple Group for bringing Snapple iced teas K-cups and Vue packs to Keurig machines in the Spring of 2013.

SBUX remains a long term buy despite prevalent economic headwinds. SBUX is trading at a forward P/E of almost 23x, and 27% below its 52-week high. Peet's Coffee & Tea, Inc. (NASDAQ:PEET) is trading at a forward P/E of 32x, and Dunkin' Brands Group, Inc. (NASDAQ:DNKN) at 20x.

GMCR, on the other hand, is reaching valuations, where selling it short is slightly risky now, with a short ratio of 6.3 days and a forward P/E of 9x, which would mean a price of $23 at consensus 2013 EPS estimates of $2.51. GMCR's next quarter earnings (due November 5) will show the direction the company is headed in, in terms of earnings growth amidst competition. We expect it to be disappointing.

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

Business relationship disclosure: The article has been written by Qineqt's Retail Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.