Green Mountain Coffee Roasters - Enthusiasm About Renewed Starbucks Deal Results In Premium Valuations

| About: Keurig Green (GMCR)
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Shares of Green Mountain Coffee Roasters (NASDAQ:GMCR) saw an incredible 28% jump in Thursday's trading session.

The coffee company reported a solid set of second quarter results, while it also announced a long term strategic partnership with Starbucks (NASDAQ:SBUX). Following the jump shares are a bit too expensive to my taste.

Second Quarter Results

Green Mountain Coffee Roasters generated second quarter revenues of $1.00 billion, up 14% on the year before. Revenues just missed consensus estimates of $1.02 billion.

Strong operating leverage resulted in a solid 42% increase in operating earnings, coming in at $212.1 million. GAAP net earnings rose by a similar percentage to $132.4 million, coming in at $0.87 per diluted share. Non-GAAP earnings per share advanced to $0.93 per share, beating consensus estimates of $0.73 per share.

CEO Brian P. Kelley commented on the developments during the quarter, "Our fiscal second quarter results demonstrate the leverage inherent in our business model. Our industry-leading single serve business - made up of single serve packs, Keurig brewers and accessories - grew a healthy 16% in our second fiscal quarter contributing to strong earnings growth and significant free cash flow generation."

Looking Through The Income Statement

Growth in revenues was driven by a 21% revenue increase in single serve packs, coming in at $794.0 million. Revenues were driven by a 26% increase in volumes, partially offset by a 5% negative impact as a result of a changing product mix.

Revenues from brewers and accessories fell by 10% to $126.8 million. Some 1.36 million Keurig system brewers were sold, down 9% on the year before.

The shift to single serve packs put pressure on sales of products and royalties, which includes traditional coffee packages. Sales were down 7% on the year before.

Earnings were furthermore boosted by a 590 basis points increase in gross margins, coming in at 41.3%. Margin improvements were mostly driven by lower coffee costs, lower overhead, warranty and manufacturing costs.


For the current third quarter, Green Mountain expects net sales to increase between 11 and 15% on the year before. Non-GAAP earnings are expected to come in between $0.71 and $0.78 per share, up 37 to 50% on the year before, but down from second quarter earnings of $0.93 per share. The earnings guidance came in ahead of consensus estimates of $0.65 per share.

For the full year of 2013, revenues are expected to increase between 11 and 14%. Excluding the impact of a 53rd week in 2012, sales rose between 14 and 17%. Non-GAAP earnings per share are expected to come in between $3.05 and $3.15 per share, up 27 to 31% on the year. Previously, Green Mountain guided for full year earnings of $2.72 to $2.82 per share.

The company reckons that it has only achieved a 13% household penetration rate with its Keurig system, leaving considerably more opportunities for growth. The company will furthermore target new channels, brands, geographies and technologies to drive further growth.

Green Mountain sticks with is long term outlook of annual net sales growth of between 15 and 20%.


Green Mountain Coffee Roasters ended its second quarter with $221.7 million in cash and equivalents. The company operates with $350 million in short and long term debt, including capital lease obligations, for a net debt position of around $130 million.

Green Mountain generated $2.34 billion in revenues for the first six months of the year, up 14.7% on the year before. Net income rose 21.5% to $240.5 million, coming in at $1.57 per diluted share.

The company guides for full year revenues around $4.35 billion. Green Mountain could earn around $3.10 per share, around $460 million.

Factoring in a 28% jump on Thursday, the market values Green Mountain at $11.3 billion. This values the firm around 2.6 times annual revenues and 24-25 times annual earnings.

Green Mountain does not pay a dividend at the moment.

Some Historical Perspective

Shares of Green Mountain have seen incredible volatility over the recent years. Shares rose from merely $5 in 2008 to highs around $110 in 2011. Shares fell all the way back to levels of $20 in the summer of 2012, but have nearly quadrupled, currently exchanging hands at $76 per share.

Between 2009 and 2012, Green Mountain Coffee Roasters has seen its revenues five-fold to $3.86 billion. Net income advanced from $54.4 million to $362.6 million in the meantime, as the shareholder base increased by roughly a third.

Investment Thesis

The second quarter earnings report and guidance were both a little soft on revenues, yet earnings comfortably beat consensus estimates. The sustainability of this earnings beat seems rather low as roughly half the gross margin expansion was the result of lower coffee costs.

The earnings report is not the major driver behind the jump in the share price. Green Mountain announced a renewed partnership with Starbucks. Since its first partnership, announced in March of 2011, Starbucks has shipped some 850 million coffee K-Cup packs.

With the renewed partnership, the companies hope to broaden, deepen and extend their partnership in a new five-year deal which includes many more brands including Torrefazione Italia, Teavana and Starbucks Cocoa. The new deal will also apply to the international expansion.

CEO Kelley calls the partnership, "a big win for our shareholders, customers and consumers. The contract may be renewed for another five year upon achieving mutually agreed upon volumes."

I think the recent run-up and the reaction in response to the partnership with Starbucks are a bit overdone. The solid gross margins improvements are not sustainable while revenue growth is a bit disappointing. As a result of the price run-up the valuations have gone up too much, too fast at around 25 times annual earnings.

I remain on the sidelines with a slightly bearish stance.

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.