Trouble Continues to Brew at Green Mountain Coffee Roasters
RJ is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Several weeks ago we admitted that our fair value for Green Mountain Coffee Roasters (GMCR) was likely overly optimistic. Thus, we put the firm’s value under review. During this time, the company’s future outlook has taken a hit based on slowing K-cup sales, and worries over Keurig patent losses. Additionally, founder and former Chairman Robert Stiller was ousted after he received a margin call that forced him to sell $125.5 million in stock, which he had held as collateral for his purchase of a yacht. We are lowering our fair value range to the range of $13 to $39 (with $26 per share as our point estimate), on the basis of more conservative forward looking cash-flow generation.
Of course, after “timely” sales in the past, Stiller’s sale likely exasperated the rapid share price decline, which has eliminated over 50% of the company’s value over the last few weeks. Nevertheless, we think the price decline is warranted, given Green Mountain’s questionable corporate governance and somewhat baffling decisions. For instance, Green Mountain has been eating up cash flow with investments to boost capacity—yet management cited excess capacity as a drag on profits in the previous quarter.
Further, management did not alter its guidance for fiscal year 2012, saying they expect earnings per share to come in between $2.40 and $2.50. The company also maintained its revenue guidance in the face of generic competition coming on line in the back half of the year and discounting of K-cups to clear excess inventories. We’re also skeptical that sales of its new single-cup brewer, the Vue, will accelerate much. While Keurigs seemed to have “sold themselves” during the past few years, we’ve seen more marketing of the machines with mall and store displays that suggests softer sales than before, in our view.
With the stock trading at around 10-11x 2012 earnings, and the possibility that those earnings may actually fall in 2013, we don’t view shares as particularly inexpensive, though its multiple is considerably lower than that of Starbucks, for example. However, we expect that the share price will continue to be quite volatile for the remainder of 2012. It wouldn’t surprise us at all to see Green Mountain move up (or down) another 50%. Still, we focus on value not price, and at current levels, we don’t think Green Mountain is much of a bargain. Green Mountain currently scores a 4 on our Valuentum Buying Index rating system.
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