Green Mountain's (GMCR) stock is down 15% in the last month, as investors continue to fear for the company's future after the expiration of its K-cups patent and competition from Starbuck's (SBUX) coffee machine Verismo, which we discussed in our last article. The stock was up 6% yesterday because of an 8K filing, which named Gerard Geoffrion as the president of international business development, as GMCR now looks for geographical diversification of its business given that its North American business' hyper growth has slowed. We still advise against a long position in GMCR, as details of the international expansion are still not certain, and because the company will face significant competition even when it expands abroad.
Gerard Geoffrion is the former CEO of Van Houtte, which is one of the many brand names under GMCR. He was running the Canadian business of GMCR before this position. The company's international expansion plan has yet to be laid out. There would be significant competitive pressures for Green Mountain there as well, from the likes of Nestle (NSRGY.PK) SA in Europe. Nestle has a global market share of 35%, with Nespresso single serve coffee. Starbucks has planned to introduce its brewer, Verismo, in the Chinese market in 2013 along with Mondelez International (MDLZ), which is considering entering China too. Nescafe (a brand under Nestle) is quite common in Asian countries. According to a Bloomberg article, Nescafe makes up two out of every three cups in Asian countries. Nestle expects China to be its second largest market after the U.S.
News in North America is still not favorable, with Kraft (KRFT) planning to sell Maxwell House and Gevalia K-cup pods for Keurig machines, the former being the 3rd largest U.S. coffee brand after Folgers and Starbucks, according to a Reuters article. They are expected to come out in the coming months. SBUX K-cups along with Dunkin Brands' (DNKN) K-cups for GMCR's brewers are still licensed, so GMCR still gets revenue from that source. TC Global's filing for Chapter 11 is another blow to GMCR's brands, Tully's. GMCR had bought Tully's wholesale business while TC Global operated the retail outlets. Though the company spokesperson says that sales to Tully's stores are not material, the closing down of retail outlets can damage brand, and hurt wholesale revenues. Starbucks, on the other hand, has made its brewers available at its stores.
The company is expected to report its next quarter earnings. Any news about an international move can be a catalyst for share price appreciation, as the stock has been beaten down quite a lot, and is currently trading at a P/E of 9x. The company is supposed to report on 5th November and will likely address future international plans.
At 2013 consensus EPS estimates of $2.51 and a forward P/E of 9x, the stock price comes out to be $23. A short position is not advisable at the current low multiples, in addition to a short ratio of 6 days and 38% of the float short. We would only advise investors to buy GMCR on international expansion, once the company announces a more actionable plan. Recently, the stock has been too volatile on news of competitor moves to make for an attractive investment.