Green Mountain Coffee Roasters Vs. Starbucks Corporation - A Case For Green Mountain

| About: Keurig Green (GMCR)
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So, the market just loves Starbucks (NASDAQ:SBUX) and hates Green Mountain Coffee Roasters (NASDAQ:GMCR) now. Starbucks announced on March 8, that it would enter the single serving coffee machine business, which Green Mountain currently dominates. This sent GMCR shares plunging by as much as 20% after hours, while SBUX soared past $50 per share.

There have been a few articles on why GMCR is still not a good buy after the plunge. This contrarian article presents a few points on why not all is lost for GMCR and its shareholders, fully acknowledging the company has its fair share of bad news as well.

Valuation: Can you believe GMCR is trading at a lower valuation than Starbucks? It wasn't long ago that GMCR was trading at lofty valuations like Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) were. GMCR now trades at 27 times earnings while SBUX trades at 31 times. Yes, Starbucks is expected to grow at a faster rate but looking at the PE, the growth is almost priced in.

Price Targets: Taken with a pinch of salt, analyst estimates broadly give an idea of where the stock is expected to head in the next 12 months. Starbucks's price target of $54 is not too far away, while GMCR's $88 is a good 70% away. (There maybe a few upgrades/downgrades coming along next week.)

History: Let's face it; GMCR is a trader's stock going by recent history. In November 2011 the stock tanked close to 40% one day, before rebounding in a matter of few days. So, those with quick hands can make a ton of money trading it over such sharp drops as the one on Friday, March 9, 2012.

Earnings: GMCR has consistently beaten by the earnings estimate, as can be seen from 3 of the 4 quarters shown below. The EPS has been more or less steady and increased by a good percentage in the December quarter of 2011. At the end of the day, it's the company's earnings growth that matters.

(Click chart to enlarge)

Not a Zero-Sum Game: The way the market reacted to Starbucks's entry into the single-serve business was like GMCR will surrender its total market to Starbucks. The $8 Billion single-serve business is not a zero sum game. GMCR does not need to lose for Starbucks to win.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GMCR over the next 72 hours.