Starbucks & Green Mountain: Solid Plays For 2012
Helen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Big Coffee Gets Tougher
Starbucks (NASDAQ: SBUX) announced that they are introducing another product which will attempt to shut down all coffee competition. The Verismo is hoped to be a direct competitor with Nestle’s Nespresso machines which have taken European coffee drinkers by storm. Single serving coffees are not all that new, but the single cup espresso machine is still an open market.
Green Mountain Coffee Roasters (GMCR)
Many are saying that this move from Starbucks is going to hurt supposed partners Green Mountain Coffee Roasters (NASDAQ: GMCR), but I am holding back from jumping ship so soon. In fact, with a drop in Green Mountain stock price putting it at just about $52 per share, this may be the perfect time to buy.
That’s right, I said it’s time to buy some Green Mountain stock. Green Mountain and Starbucks both claim that they are not competing for the same single-serving coffee market. The Green Mountain K-cups collaboration between the two companies is “a billion dollar business” according to a statement made by Starbucks CEO Howard Schultz. The announcement was specifically not meant to be a jab to the ribs, and Green Mountain has been quick to re-assure investors that they do not take Verismo as a bad sign.
Many investors got the opposite message, however, as the stock price for Green Mountain tumbled an incredible 15%. For a lot of people, that kind of news encourages hesitation, but I am going the other direction. Green Mountain is still going to go up, they just have farther to rise now and investing today means bigger gains on a good stock.
The Details
Both Green Mountain and Starbucks were quick to inform investors that they are not viewing this as a rift in the relationship. In addition, Starbucks overtly stating that what they really want with the Verismo introduction is to get a chunk of the Nespresso market, especially the potential American market, which Starbucks’ already world-wide brand could easily take. Green Mountain makes a product that appeals to primarily American consumers, single serve cups of coffee. Nespresso and Verismo are single serving espresso machines.
This may seem like a tiny discrepancy, but nothing is tiny in the world of coffee. Consumers are incredibly discerning in their taste, even when they have terrible taste in coffee. We like what we like, which is part of the reason that both Starbucks and Green Mountain are so successful in the first place. Coffee drinkers drink coffee, and espresso drinkers drink espresso. Green Mountain is a coffee company. Starbucks has made its name with espresso drinks, and they feel it is time for them to jump into the single serving, at-home espresso maker market.
Then again, the news being parsed in that way probably gives very little confidence to you as an investor. Which is completely understandable. And for reasons of full disclosure, this isn’t the full story. Green Mountain has also started developing a capsule-based espresso machine with Luigi Lavazza SpA and that product is expected to hit the market later this year. What that means is that Green Mountain and Starbucks will be direct competitors with the announcement of the Verismo, just not for the reasons that skittish investors initially assumed.
But taken with the proverbial grain of salt, this still doesn’t scare me enough to run from Green Mountain. The fact is that Green Mountain and Lavazza would have been jumping into a tough market anyway, with Nespresso unlikely to give up much at this point in the game. Starbucks has a much better chance of representing real competition for Nespresso, and Green Mountain will probably perform in this realm as well as they would have been expected to, even without the Starbucks announcement. Perhaps.
Or maybe all this doesn’t work for you and you’re thinking that the risk just isn’t worth it. I think it is, and I think investors who take the gamble on Green Mountain now will be glad they did. Even if it just means some short term gains while Green Mountain recovers from the Starbucks announcement and continues to demonstrate that they are, in fact, a stable, dependable, and confident company. Nothing about the way they do business has changed, and time has shown that they are in it for the long haul.
The Alternative
While my hope is to convey that you could benefit from buying Green Mountain stock right now, while it’s low, and ready to bounce back up, the fact is that plenty of other people are saying exactly the opposite. In fact, you may be able to get Green Mountain for an even better price if you give it a few days. Rather than bet on that, I’d expect it to go up sooner, and even if I lost a bit now I’d look ahead to the gains that I believe are certain to come.
Alternatively, you could always take this moment to buy Starbucks stock, which is trading at nearly the same price. Both Green Mountain and Starbucks are trading at about $52 per share. Starbucks is probably at a peak due to the announcement, and if you look at the last 52 weeks, the price is unlikely to stick. Starbucks will probably do what they have always done, however, which is grow and continue to take over the world.
Whether you take the coffee world news as good or bad for Green Mountain, the news is good for Starbucks. You could invest in the safe option, Starbucks, and wait for the ship to come in. Or you could bet on the 'not-actually-an-underdog' Green Mountain and see a bigger benefit, even in the short term. Neither company is going away any time soon and they are both poised to make the kind of increases that we expect from the coffee industry.
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