Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Enjoy the coffee & profits - Green Mountain Coffee

|Includes: Keurig Green Mountain Inc (GMCR)


I'm going to track Green Mountain Coffee Roasters (NASDAQ:GMCR) as one of the secular growth names I follow. It operates two main segments, but its single serve k-cup market is what interests me here. The firm has a combination of high secular growth, high market concentration, high margins and reasonable price for growth. (2009-12-28)


I'll "initiate coverage" at accumulate. (buy on any pullbacks) The stock currently trades at about $73 per share, with earnings of about $2.10 for calandar FY2010. (I think this might be a bit low) Growth has been exceptional which I am applying a 30 multiple. At 1x the growth rate, my low end valuation is at about $63, with a high end of 1.5x the growth rate at about $95 per share in one year. I'm leaning towards the high end of the range for two main reasons. 1) Continued growth and expansion of the k-cup market, and 2) expected excellent keurig machine sales this holiday season resulting in a surge of k-cup sales in subsequent quarters. What I want to see this coming quarter is high machine sales and likely lower gross margins. Keurig sales are key. Clearly, I am not early in this name at this price, but there should be more gains to come as this market develops with a behemoth in this growth coffee niche.

Overview (from wikinvest)

Green Mountain Coffee operates in two business segments: stand-alone Green Mountain Coffee Roasters and Keurig. The majority of Green Mountain Coffee's revenue is derived from over 8,000 wholesale customer accounts located primarily in the Eastern United States, serving supermarkets, specialty food stores, convenience stores, offices, hotels, restaurants, universities, and food service customers. Wholesale customers resell the coffee both in whole bean and ground form for home consumption and/or brew and sell coffee beverages at retail locations. Through the acquisition of Keurig, Green Mountain Coffee has a presence in the premium quality, single-cup brew market. Keurig sells single cup brewers along with coffee and tea in K-Cups produced by licensed roaster partners, who package coffee and tea in the patented K-cups in 11 gourmet brands and in over 130 varieties. The roaster partners pay Green Mountain Coffee Roasters a royalty when the K-cups are shipped. Keurig sells the brewers and K-Cups to both wholesale and retail markets.

Secular Growth

Purely anecdotally, Keurig machines should have good secular growth. It's pricing is well below a Starbucks coffee (cost over time) and yet, still has that appeal of being something higher end. It also plays well into the growing "staycation" and home entertainment themes. As you can see below, revenues have been growing nicely for several years.

 

Explore more GMCR Data on Wikinvest

Business Model

The Keurig portion of the business model uses the tried and true Gilette Razorblade model. Buy the low margin machine; come back again and again for the high margin k-cups. Green Mountain K-Cups are offered in about a dozen or so brands giving the customer the "illusion" of differentiation between suppliers. But the reality is that Green Mountain has all but monopolized this niche sector of the coffee industry with the acquisition (pending approval as I write this) in Diedrich.

Prices for the Keurig machines typically have ranged from about $100-250; which should be in the ideal gift catagory sitting above a boring old coffee maker, but not as expensive as a high end expresso machine, yet still novel it its own way. This should be in the sweet spot and ideal for the holiday season this year. Keurig machines also appear to be selling quite well on Amazon.com. (and we know they are moving merchandise this year!)


Competitors

While Green Mountain is clearly the 900 lbs gorilla in this niche, I'm unsure how long they will be able to maintain that dominance. While there is certainly room for competition in this growing pie, new entrants are obviously not a positive for the stock. Building these single serve coffee machines have a low barrier to entry although I am uncertain at this point, regarding any patent based barriers. In any event, the key to maintaining market share for Green Mountain is to build exceptional quality machines that last.

Other info

And while I know there are plenty of mixed emotions on Cramer, this segment does provide some information on the recent drama with Diedrich. (for which I have a hard time swallowing that the stock was mere pennies earlier this year)



Watch for more updates to this entry. I'll try to keep the chart fairly up to date, and datestamp any updates as this company develops over time.

Disclosure: no position