Green Mountain Coffee Roasters - Business Continues To Grow, Despite Patent Expiry

| About: Keurig Green (GMCR)
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Shares of Green Mountain Coffee Roasters (GMCR) rose up to 25% in after hours trading. The specialty coffee and tea producer, known for its Keurig business, reported its fourth quarter results after the market close.

Fourth Quarter Results

Green Mountain Coffee Roasters reported fourth quarter revenues of $946.7 million, up 33% on the year. Sales were driven by the fact that Green Mountain's fourth quarter had an extra week, and came in much higher than analysts expectations of $902.7 million.

Gross margins fell 230 basis points to 33.4% as a result of higher manufacturing costs due to the ramp-up of the manufacturing base.

The company reported a 35% increase in operating income, coming in at $143.7 million. GAAP net income rose 22% to $91.9 million, with diluted earnings per share increasing a similar 23% to $0.58 per diluted share. Adjusted earnings, which exclude one-time items related to regulatory inquiries rose to $0.64 per share, comfortably beating analysts consensus of $0.48 per share.

During the quarter, Green Mountain repurchased roughly 3.1 million shares, roughly 2% of its total shares outstanding.

CEO Lawrence J. Blanford commented on the results, "Our fourth quarter fiscal year 2012 revenue and earnings growth speaks to GMCR's continued strategic progress and we believe points to the significant opportunity still ahead for the Company. We continue to drive awareness of Keurig single cup brewing and consumers continue to embrace and adopt Keurig brewers and Keurig Brewed beverages as an integral part of their daily routine."

Detailed Information

Growth in the fourth quarter was driven by the outstanding performance of the single serve pack division. Revenues were up 47% to $700.2 million. Growth was driven by a 50% increase in volumes, partially offset by a small decline in the product mix and lower prices.

Brewers and accessories revenues were up 30% to $150.1 million as the company sold 1.8 million Keurig Single Cup Brewers.

Revenues from other products and royalties fell 21% to $96.4 million, mainly as a result of the sale of Filterfresh in October of 2011.


For its first quarter of its fiscal 2013, Green Mountain Coffee Roasters guides for 14 to 18% growth in net sales. This translates into first quarter net sales of $1.32-$1.37 billion. Non-GAAP earnings per share are expected to come in between $0.62 and $0.67 per share, excluding charges totaling $0.06 per share.

Full year sales for its fiscal 2013 are expected to grow between 15 and 20%. This translates into full year revenues of $4.44-$4.63 billion, ahead of consensus estimates of $4.39 billion.

Full year non-GAAP earnings per share are expected to come in between $2.64 and $2.74 per diluted share. This excludes $0.23 per share in amortization charges, related to previous acquisitions. The earnings guidance comes in ahead of consensus estimates of $2.49 per share.


Green Mountain Coffee Roasters ended its fiscal year of 2012 with $71.2 million in cash, restricted cash and equivalents. The company operates with $531.5 million in debt and capital lease obligations, for a net debt position of roughly $460 million.

For its fiscal year of 2012, the company generated annual revenues of $3.86 billion. The company reported a net profit of $363.5 million, or $2.28 per diluted share.

Factoring in a 25% jump in after hours trading, the market values the firm at roughly $5.6 billion. This values the firm at roughly 1.5 times 2012s annual revenues and 15-16 times reported annual earnings. The valuation multiples come down to 1.3 times 2013s annual revenues and roughly 13 times annual earnings.

Green Mountain currently does not pay a dividend.

Some Historical Perspective

Year to date, shares of Green Mountain Coffee Roasters have lost roughly 20% of their value. Shares rose from $45 in January to highs of $70 in February of the year. Fears of increased competition from Starbucks (NASDAQ:SBUX), the short thesis of hedge fund manager Einhorn, and a deteriorating operating performance, send shares to lows of $17 during the summer. From that point in time, shares have more than doubled, currently exchanging hands at $36 per share.

Over the past couple of years, shareholders have been taken for a ride. Shares rose from lows of $5 in 2008 to an all-time high of $110 in 2011. Shares fell over 85% to lows this summer, recovering in recent months.

Between 2008 and 2012, Green Mountain expanded revenues from roughly $500 million to $3.9 billion. Net earnings rose from $21.7 million to $363.5 million over the same time period.

Investment Thesis

Shares are jumping strongly upwards in after-hours trading, and for a good reason. The results for the final quarter are very strong, and the strong outlook for 2013 assures investors that the expiration of key patents in September is not disastrous. The US market for single-serve coffee remains to grow into the next year.

Outgoing CEO Blanford says that the company remains on track with its "continued strategic progress." The company furthermore diversifies into wellness drinks, and tries to push consumers towards its Vue system, which still has patents.

At the moment, shares are valued at 1.3 times annual revenues and 13 times 2013s expected earnings, even when factoring in the 25% jump. At the presentation of its third quarter results, when shares were trading in their low-twenties, I thought shares were attractive, despite future uncertainties. After shares have doubled from their lows, today I remain on the sidelines. I think current levels offer an excellent exit opportunity to take some profits of the table.

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