Is Green Mountain’s Chill Finally Over?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As summer heats up one would assume that coffee drinkers cool down on their appetite for the brewed stuff. That would also point to more potential problems for the once steamy Green Mountain Coffee Roasters (NASDAQ: GMCR). However, I think investors have cooled down their prospects for the brewer so much so that they might be missing the fact that there still is a disruptive innovator that’s not dead yet.
In another great Fool.com article on the company called, “Blue Skies for Green Mountain,” the author gives a few interesting points that I hope investors haven’t overlooked. I think the biggest point to consider is that they could easily charge more for their brewers to offset any looming patent expirations for the K-Cups. The brewer has the potential to be the gatekeeper to the drink of your choice. Green Mountain of course would love to make high margin dollars on the K-Cups and they’ll do that to a degree in their owned brands. They’ll also have the ability to make money either though manufacturing private-label K-Cups for other brands as well as continuing to take a little off the top from each of their owned brands. The big question that remains will be how their licensed brands such as those from Starbucks (NASDAQ: SBUX) and Dunkin’ Brands (NASDAQ: DNKN) fair post patent expiration. Given the fact that Starbucks is going to finally start selling K-Cups in their own stores, it’s unlikely this is just a short term proposition. While Starbucks is working on a brewer of their own, the biggest hurdle for any competitor will be in the massive 10 million plus brewer installed base that Green Mountain has amassed. As customers either upgrade their current brewers and finally convince that friend or relative to join the party, it’s more likely they’ll stick to a Green Mountain branded brewer than switch in order to save a few dollars.
The other interesting project the article mentioned is that Green Mountain is working with pharmaceutical companies on potential brewed drinks fortified with vitamins and minerals for wellness. This reminds me of Coca Cola’s (NYSE: KO) Vitamin Water drinks and the value there is enticing. Coke paid $4.1 billion for that unit’s parent Glaceau in 2007 when it had just $350 million in revenue. It is a stretch to think Green Mountain can follow in Glaceau’s footsteps, but it does demonstrate that they do have multiple untapped opportunities to drive future growth.
In addition to these blue sky views, I think another reason investors shouldn’t be so cold towards Green Mountain is in their ability to cool down a summer sizzler. Iced beverages brewed by their Keurig are still developing but provide a nice balance to their hot drinks, if they can get it right. I say still developing because most of the iced brews on offer are either currently out of stock at their online store, or just not very good. With Raspberry Iced Tea being my personal drink of choice in the summer, I was very disappointed in the Hain Celestial (NASDAQ: HAIN) offering of “Sweet Raspberry Perfect Iced Tea” for my Keurig Brewer. It had a very artificial chemical like taste, wasn’t very sweet and nor did it have much of a Raspberry flavor. With a majority of their other iced offerings being either in their owned coffee brands or other varieties from Hain Celestial, they’ll need to brew up a better selection if they want to heat up this potentially lucrative growth opportunity.
Green Mountain might have cooled off, but they certainly have not frozen over. Analysts still project earnings growth of more than 40% this year and nearly 30% next year making shares a very refreshing seven and a half times forward earnings. I still think the company has plenty of opportunities to brew up some excellent returns for shareholders.
latimerburned owns shares of Green Mountain Coffee Roasters and has abear put spread on Green Mountain Coffee Roasters. The Motley Fool owns shares of The Hain Celestial Group, The Coca-Cola Company, and Starbucks. Motley Fool newsletter services recommend Green Mountain Coffee Roasters, Starbucks, The Coca-Cola Company, and The Hain Celestial Group. 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.If you have questions about this post or the Fool’s blog network, click here for information.