Green Mountain Coffee Roasters Has Good Things Brewing

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Shares of Green Mountain Coffee Roasters (NASDAQ: GMCR) rose more than 20% in early trading on Wednesday after the Waterbury, Vermont-based maker of Keurig single-serve coffee makers reported strong fourth-quarter results and gave better-than-expected outlook.

Q4 and Full Year Results

For the fourth quarter ended Sept. 29, Green Mountain posted a profit of $91.9 million, or $0.58 per share, compared to $75.4 million, or $0.47 per share reported for the same period in the previous year. Excluding one-time items, Green Mountain reported earnings of $0.64 per share, beating Street estimates of $0.48 per share.

Total revenue for the fourth quarter rose 33% to $946.7 million, driven by stronger sales and price increases for the company's single-serve coffee packs. Analysts had forecast fourth-quarter revenue to come in at $902.7 million. GMCR's gross margin, however, narrowed from 35.7% to 33.4% in the fourth quarter, primarily due to higher labor and overhead manufacturing cots related to the ramp-up of the company's manufacturing base.

For the full-year, the company reported revenue of $3.86 billion, compared to $2.65 billion reported in fiscal 2011. Operating income for the full year was $568.9 million on a GAAP basis and $368.9 million on a non-GAAP basis. GAAP net income for the full year was $362.6 million, up 82% over fiscal 2011. Non-GAAP net income for the quarter was $248.8 million, up 53% over fiscal 2011.

Outlook

While GMCR's fourth-quarter results beat estimates, the company's outlook suggests that the strong performance will continue.

For the first quarter of fiscal 2013, GMCR expects adjusted earnings to be between $0.62 per share and $0.67 per share on sales growth of 14% to 18%. This is above the consensus forecast of earnings of $0.59 per share and sales growth of 12%.

For fiscal 2013, the company raised its adjusted earnings forecast. The company now expects adjusted earnings for fiscal 2013 to be between $2.64 per share and $2.74 per share, up from the previous guidance range of $2.55-$2.65 per share. Green Mountain continues to expect 15% to 20% sales growth for the full fiscal year.

Management Confident

GMCR's President and CEO, Lawrence J. Blanford, who will be replaced by Brian Kelley on Dec. 3, said that the company's fourth-quarter fiscal 2012 revenue and earnings growth speaks to its continued strategic progress and the company believes it points to the significant opportunity still ahead for the company.

CFO Frances G. Rathke said, "We expect to continue to strategically invest in the business as demand warrants, and continue to forecast free cash flow in a range of $100 million to $150 million for fiscal year 2013."

An Ideal Successor

Speaking at a conference call, Blanford said, "I am confident that in Brian Kelley we have identified an ideal successor, one eminently capable of taking us to the next level of the growth and opportunity for Green Mountain."

Investors certainly agree with Blanford as GMCR shares had rallied following the announcement of Kelley's appointment as CEO, effective December 3.

Excellent Run but Concerns Remain

While GMCR shares have had an excellent run in the last few days, there are still concerns about the company. In fact, as per the most recent data, short interest in GMCR was 42.10% of the total float. One of biggest critics of Green Mountain has been hedge fund manager David Einhorn, who has challenged the company's accounting practices.

In the recent past there have also been concerns over increasing competition after the company's patents on single-serve coffee pods for its Keurig brewers expired in September.

Not surprisingly GMCR shares have been extremely volatile in the last few months as can be seen in the daily chart below.

Source: stockcharts.com

Valuation

GMCR shares are currently trading well below their 52-week high of $71.15, despite the surge in early trading on Tuesday. YTD, the stock has fallen more than 19%.

The stock trades on a P/E (TTM) ratio of 16.55, which is well below the industry average of 19.90. The P/S ratio for GMCR is 1.24, which is slightly above the industry average of 0.86.

Competitor Landscape

Seattle, Washington-based Starbucks (NASDAQ: SBUX), one of Green Mountian's rivals, currently trades on a P/E ratio of 28, which is significantly above the industry average and GMCR's P/E ratio. SBUX trades on a P/S ratio of 2.81, which again is higher than GMCR's and the industry average. YTD, Starbux shares have gained nearly 9%.

For the quarter ended Sept. 30, Starbux had reported revenue of $3.36 billion and net income of $359 million.

Staten Island, New York-based Coffee Holding Co. (NASDAQ: JVA) trades on a P/E ratio of 58.20 and P/S ratio of 0.24. YTD, JVA shares have fallen nearly 4.5%.

For the quarter ended July 31, 2012, Coffee Holding had reported revenue of $44.48 million. The company's gross profit for the quarter was $3.88 million. Net income for the quarter was $1.23 million. These figures do not compare favorably with GMCR.

What Should You Do with GMCR

Compared to SBUX, GMCR certainly looks attractively valued. The company's fourth-quarter results indicate that increasing competition following the expiration of patents on single-serve coffee pods for its Keurig brewers has not had any significant impact as yet. The appointment of Brian Kelley is also being seen as a positive for the company. GMCR shares have been extremely volatile; however, recent developments have given the stock some momentum. I see significant upside potential from current level.


StockRiters.com has no positions in the stocks mentioned above. The Motley Fool owns shares of Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Green Mountain Coffee Roasters and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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