Editor's Note: This article has been updated to correct a material error regarding the circumstances surrounding Mr. Stiller's margin call.
Green Mountain Coffee Roasters (GMCR) is attractively priced after its fall from grace in mid-2011. It has lost about 80% of its value, dropping from a high of $107.99 per share to its current price of just $22.83 per share. Its current share price gives the company a market valuation of $3.55 billion. The company's closest competitors are Starbucks (SBUX) and Hillshire Brands (HSH).
Here are several reasons to invest in GMCR:
- The company is growing rapidly. GMCR's revenue has grown at an average of 74.3% over the last three years, while its EPS growth has averaged 89.2% over the same time period. The industry average is -11.2% and 8.8%, respectively.
- GMCR is attractively priced after its founder, Robert Stiller, was forced to sell 5 million shares to cover margin calls on loans he owed. For more information about this, I'd suggest reading this article. This incident occurred due to GMCR's share price halving after its May 2 earnings call, to near its current level. Even though the company is growing rapidly, as illustrated by its revenue growth, its P/E ratio is just 10.4 currently, compared to an industry average of 19.2.
- GMCR has rapidly increased capital expenditures over 2011. In 2010, it spent $118 million on capex, and in 2011 it spent $283 million -- a more than 100% increase. This shows the company's desire to expand rapidly in the future and exploit the growing marketplace. GMCR also has a very nice debt-to-equity ratio of 0.2, which is just one-third of the industry average.
However, GMCR has a fearsome competitor in Starbucks, which might cause problems for growth in the future. Recently, Starbucks moved into direct competition with GMCR with its release of a take-home Starbucks coffee machine. Nonetheless, GMCR has already shown its ability to compete on a level playing field with Starbucks, and most likely will not lose a sizable portion of its revenue as a result of this continuing competition.
Therefore, GMCR is very undervalued at its current level. The board of directors removed Stiller as the chairman, which is a sensible decision in my opinion. Management has shown it is responsible and ready to take measures that are necessary to help the company succeed. The company is also growing rapidly and increasing its profit margins. All these factors are very good news for potential investors in the stock.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GMCR over the next 72 hours.