Did Green Mountain Just Hit the Sweet Spot?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are few things better in life than a freshly brewed beverage that hits your palate with the perfect blend of taste and temperature. We all know that a Green Mountain (NASDAQ: GMCR) Keurig can brew a fantastic cup of coffee; their Timothy’s Cinnamon Pastry Coffee that I’m currently enjoying is a prime example. With a variety of more than two hundred delicious flavors it would seem that Green Mountain could satisfy almost any taste bud.
Unless of course, you were craving a non-coffee brewed beverage that didn’t come out piping hot. It’s not that they don’t offer anything to satisfy these taste buds; the problem was that what they had to offer wasn’t all that great. All of their flavored iced tea k-cups from Hain Celestial (NASDAQ: HAIN) either received poor customer ratings or were unavailable this summer. I personally never ventured past their Sweet Raspberry Perfect Iced Tea because it didn’t come anywhere close to living up to the name.
This left a large market opportunity that was being missed, one that they might finally have found the answer to. I admit that after a less than enjoyable experience with the Hain Celestial offering I wasn’t in a hurry to try Green Mountain’s own Vitamin Burst fruit brews when they were launched this summer. It wasn’t until I read through some of the reviews on this highly rated product that I thought I’d give it a try. To my surprise I think that they might have hit the sweet spot on this one.
This is important for a number of reasons, topping the list is the fact that this is a product on their own home brewing instead of something that’s part of a licensing or manufacturing agreement with one of their many partners such as Hain Celestial, Dunkin’ Donuts (NASDAQ: DNKN), Caribou Coffee (NASDAQ: CBOU) or Starbucks (NASDAQ: SBUX). With their looming patent expiration their owned brands will be increasingly important for percolating future profits.
A lot has been made of Starbucks’s future intentions as well as the profits they’ll be able to savor from both Dunkin’ and Caribou. First the market hit a caffeinated high after Starbucks decision to partner with Green Mountain by offering their own k-cups. Shortly thereafter the market spit shares back out after it was learned that Starbucks will apparently be competing with them by announcing their own machine, the Verismo. Couple that with each passing day taking us one closer where companies like Dunkin’ and Caribou won’t necessarily need Green Mountain to make a K-Cup and it’s easy to understand why shares have been pressured.
It's all about extending the business model for Dunkin', Caribou and Starbucks as their core business is running a retail store. However, the revolution of the Keurig makes it so that you can skip the line and have a your choice in a variety of great cups of coffee in about a minute in the comfort of your own home or office. That's a potential disruption to their business models so it made sense to join the disruption by extending their brand into their customer's homes. The key for each is to get consumers addicted to their brand to earn incremental dollars no matter where consumers were consuming. Those licensing deals were a boon for Green Mountain but the patents that protected those profits are nearing an end.
That's where Green Mountain has extended their own competitive advantage by expanding the variety of their owned brands. At first it was through an acquisition binge which brough in the likes of Timothy's and others but now they're focusing more on growing these brands and more importantly an extention of them to become their profit centers going forward.
An example of this is their Vitamin Burst offering which is part of a new platform called Wellness Brewed. This is a platform which they are building out a variety of top quality, exceptionally flavored fruit brews, coffees and teas. Add these to a growing list other brewed over ice products such as lemonade and their new Sweet & Creamy products and it makes that patent cliff less steep.
At just eleven and a half times earnings Green Mountain could be offering up a pretty tasty value these days. Once we get past their patent cliff this fall and see how the company manages their growth going forward they just might be the type of growth stock that can really add some juice to any portfolio. That’s one reason I’ve added them to my watch list. If they can get their inventory under control and continue to develop great new products, they’ll make their shareholders very satisfied.
latimerburned owns shares of and has an options position on Green Mountain Coffee Roasters. The Motley Fool owns shares of The Hain Celestial Group and Starbucks and has the following options: long DEC 2012 $16.00 puts on Green Mountain Coffee Roasters and short DEC 2012 $21.00 calls on Green Mountain Coffee Roasters. Motley Fool newsletter services recommend Green Mountain Coffee Roasters, Starbucks, 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.