Green Mountain Coffee Roasters: Profit Potential While Waiting For The Green Light

Oct.17.12 | About: Keurig Green (GMCR)

Green Mountain Coffee Roasters, Inc. (NASDAQ:GMCR) is engaged in two operations: the specialty coffee and coffee maker business. The specialty coffee unit produces coffee, tea and hot coca from a portfolio of brands, including Tully's Coffee, Green Mountain Coffee, and Newman's Own Organics coffee. The Keurig business unit manufactures gourmet single-cup brewing systems and K-Cup portion packs and markets the system for consumers at home and away-from-home. While the Keurig business is currently under pressure with the entry of a new competitor, Kraft Foods Group Inc. (KRFT), GMCR's solid fundamentals and strong brand royalty should allow it to outperform its peers in the long-term. In the short-term, GMCR's stock price is stabilizing and could turn green soon from a technical perspective.

Recent Development

As reported by Reuters on Oct. 11, 2012, Kraft Foods Group Inc. will soon sell Maxwell House and Gevalia single-serve coffee cups compatible with GMCR's Keurig brewing system, which will not be produced through a licensing agreement with GMCR as said by Kraft. While this new development will definitely impact the landscape for the Keurig brewing system business, it is tough to assess how much the decline of GMCR's market share will be compensated by the popularity increase of the Keurig system. In addition, it is still unclear if most of the GMCR's patent protection had expired in Sep., 2012 or will expire in 2017, where a more detail report on this issue can be reviewed here as written by Martin Redfield from Seeking Alpha. One thing for sure is that more competitors will join if Kraft becomes successful in gaining market share from GMCR. Nonetheless, GMCR's coffee quality and brand royalty will continue to remain as its core strength and it will not be easy at all for the competitors to take over.

Fundamental Strength

While more competition for GMCR is already expected in the Keurig business segment, it is important for us to evaluate if GMCR's fundamentals are strong enough to withhold the market changes, as well as the current valuation for GMCR as compared to the industry average. Attached below is a chart comparing GMCR's key fundamental stats to the industry average.

Key Stats

Green Mountain Coffee Roasters, Inc.

Industry Average

Price/Earnings ttm

10.2

21.9

Price/Book

1.6

4.4

Price/Sales ttm

1.0

1.2

Revenue Growth (3 Yr Avg)

74.3

-11.2

EPS Growth (3 Yr Avg)

89.2

8.4

Operating Margin %, ttm

14.7

8.4

Net Margin %, ttm

9.6

5.4

ROE, ttm

17.2

13.7

Debt/Equity

0.2

0.6

Click to enlarge

Source: MorningStar

With 10.2 P/E and 1.6 P/B, GMCR is much under-valued as compared to the industry average of 21.9 and 4.4. GMCR's revenue growth of 74.3, ESP growth of 89.2 are all out pacing the industry average of -11.2 and 8.4 significantly. The operating margin and net margin of 14.7% and 9.6%, as well as 0.2 debt-to-equity are all showing strong numbers as compared to the industry average.

Short-Term Technical

GMCR closed at $22.03 Monday's trading with a 0.14% gain. The volume of 4.27M is 43.6% less than the 30 day average volume of 7.57M. Since Sep. 11, 2012, GMCR had declined from $32.16 with a 31.5% loss. The picture looked even worse as comparing to its 52 week high of $95, where GMCR had dropped a whopping 76.81%. By taking a look at the chart below, MACD (12, 26, 9) is still showing a bearish sign for GMCR's trend. However, the MACD difference had been narrowing in the past few trading days. In addition, GMCR is still trading below its 50-day moving average of $25.28 and 200-day moving average of $36.25. From the momentum perspective, RSI (14) of 38.15 is near the over-sold territory. While the selling pressure will still continue for a while with 50-day MV of $25.28 as a short-term resistance, the selling pressure seemed to be stabilizing.

Click to enlarge Source: StockCharts.com

56.25% Profit Potential While Waiting for the Green Light

In the short-term, we expect some support for GMCR at $20 and a credit put spread option play is reviewed here for the traders/investors who have the intention of acquiring the stock at a discounted price as the worst case scenario.

Short 1x GMCR Jan, 2013 Put at the Strike Price of $20 for the credit of $2.43

Buy 1x GMCR Jan, 2013 Put at the Strike Price of $17.5 for the cost of $1.53

Based on the Oct. 15, 2012's closing prices, the maximum profit for this option play is $0.90 and the maximum risk/margin requirement is $1.6, which results in a profit/risk ratio of 56.25%, before all fees and expenses. For investors who would like to acquire the GMCR stock, the cost would be $19.1 ($20 - $0.90 credit received), which gives an edge of 13.3%, as compared to Monday's closing price of $22.03.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GMCR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.