Can Green Mountain Coffee Roasters Go from Zero to Hero, Again?
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The date is Sept. 16, 2011. Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR) is trading at $107.99. The stock has been on a rampage during the past years, climbing from just $3 in 2006, handing investors in the company 36 times their initial investment. Analysts left and right are upgrading the stock and raising their price targets. GMCR is rated as one of the fastest growing companies on the face of the Earth by Fortune’s Fastest Growing Companies. Green Mountain had been climbing the mountain, and was about to start its descent back to ground level.
Now yesterday on July 10, 2012, GMCR opened at a meager $23.52, representing a 78.22% drop in the stock price since that peak last September. Why such a drop? Green Mountain missed its fiscal fourth quarter earnings per share estimate by one cent and revenue by 6.7%. This caused the huge short interest in the stock to explode, taking the stock down 30% in one day. Next, David Einhorn, known infamously for his short selling, presented a 110-slide slide-show arguing that there is an apparent lack of transparency in Green Mountain’s reports and that “capital spending is growing much faster than the business.”
Pouring salt into the wound, Green Mountain management stated that it did not have a firm enough grasp of the business nor the sector to provide the transparency Einhorn was is search of. Now, Green Mountain is still trying to recover levels that it once zoomed by on its way to the peak. So can Green Mountain Coffee Roasters go from a zero to a hero, again?
“Two of Green Mountain's K-cup patents are set to expire in September, opening it up to a world of new competition by private-label brands planning lower-priced offerings and coffee companies manufacturing their own portion packs instead of going through Green Mountain. Supermarket operators Kroger Co. (NYSE: KR) and Safeway (NYSE: SWY) recently announced plans to come out with their own single-serve coffee pods for use in Green Mountain's Keurigs this autumn. Around the same time, Starbucks Corp. (NASDAQ: SBUX) is planning to launch its own high-end, single-serve espresso brewer," according to Dow Jones writer Annie Gasparro.
Kroger and Safeway both will look to single-serve coffee packets as an additional source of revenue, while Starbucks plans to build a new brand around the single-serve cups. Green Mountain is no longer the only kid on the block, which will lead to higher competition and lower margins as it fights to remain competitive. This new competition will take away from Green Mountain and give to its competitiors, but it may not break Green Mountian.
Green Mountain’s price to earnings ratio is 11.39. The average price to earnings ratio in the S&P 500 is around the 15 level. A price to earnings to growth ratio is fairly valued when it is valued at 1. Green Mountain’s price to earnings to growth ratio is 0.29. There is no denying it, Green Mountain is severely undervalued. When Green Mountain came crashing down the short sellers pushed it down well below where it is fairly valued. Additionally, on a book value per share to price per share ratio, Green Mountain is extremely cheap. Each share has $12.40 in book value, giving Green Mountain a book value per share to share price ratio around 2, which is historically low for the company. Green Mountain was a hyper growth stock, and was knocked off its pedestal, but may have fallen farther than it deserved to fall.
In 2010, earnings per share were reported at $0.70. In 2011, earnings per share climbed 134% to $1.64. It is not often that you see such explosive growth from a stock that has decreased in value over the past year. In 2012, the average consensus believes earnings per share will reach $2.40, presenting 46.34% growth. Again in 2013, Green Mountain’s earning per share is set to climb, this time to $3.03, representing 26.25% growth. There is no denying the cold hard facts, Green Mountain Coffee Roasters is growing at an incredible pace, and even if it misses the estimates to the downside, it will still have a great growth rate at the least. Green Mountain’s growth may become a catalyst for the stock to reach for higher levels. Just look at Green Mountain’s sales, operating profit, net income, net margin, and operating margin over the coming years.
The Foolish Bottom Line
Green Mountain Coffee Roasters has been falling and falling and falling, and still faces several huge roadblocks, including increased competition, resulting in the squeezing of margins, and the loss of several patents. There is no doubting it, a ride upon the Green Mountain train will not be a smooth ride higher, and it is not even certain a bottom has been established, but several years down the road the current prices of Green Mountain will look like a bargain.
makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool owns shares of 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 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. If you have questions about this post or the Fool’s blog network, click here for information.