Green Mountain Coffee Roasters: When Great is Not Enough

Green Mountain Coffee Roasters (NASDAQ:GMCR) has been one of the hottest stocks in the entire market since the beginning of the year. The stock is up 155% this year and last month the company issued a three for two stocks split to keep the stock price out of the triple digits. Clearly, GMCR is not having the same difficulty as most other companies in this recessionary environment. Growth has been the hallmark of this stock, which has seen double digit sales growth for 25 straight quarters. This quarter was no different as the company continued its breakneck growth on the back of its revolutionary Keurig Single-Cup Brewing System. Revenue for the quarter came in at $190.5 million which is a 61% increase over the same period last year. Furthermore, net income was up 123% from a year ago to $14.1 million or 36 cents per share, easily beating the Street’s expectation of 28 cents. These strong results prompted the company’s President and CEO Lawrence Blanford to say,

“We are very pleased with our performance this past quarter. Over the last twelve quarters our overall top-line growth has averaged 56%. We believe our consistently strong top-line growth demonstrates that the quality, convenience and value of the Keurig Single-Cup Brewing System have caused a revolution in how consumers prepare and enjoy their coffee…

We are in the right place at the right time with our innovative brewing system which has been so well received in the marketplace. Looking forward, we intend to continue leveraging this opportunity through the successful execution of our enabling initiatives that fuel GMCR’s growth by driving Keurig Single-Cup brewer sales and K-Cup portion pack demand.”

There is no doubt that this company has taken the world by storm, and it seems odd that shares have traded down as much as 11% in after hours trading and has settled in nearly 8% lower than the closing price following what we consider an impressive quarter. Earnings greatly outpaced even the most bullish analyst coving the stock, so the after hours trading must be in response to revenue which was a little lighter than forecasts. Remember, Green Mountain Coffee saw revenue up 61% from a year ago, but it is in fact down 1.5% sequentially. Could this really be the reason for the sell off? It certainly wasn’t the outlook as GMCR’s management is optimistic about the future and raised earnings guidance for the full year to $1.10 to $1.14 from prior estimates of $.98 to $1.02.

The market’s reaction to the results makes one wonder if the growth story could be running out of steam. Green Mountain Coffee Roasters expects growth of about 60% to 65% in the fourth quarter and growth of 45% to 50% for fiscal year 2010. Furthermore, with last quarter’s huge sales gains in most divisions including its coffee unit’s revenue rising 39% and operating margins improving to 12% from 9.6% a year ago, this reaction seems more than a bit exaggerated. That being said, the stock could not be described as cheap. Even with the improved guidance for the full year, the stock as of Wednesday’s close is trading at nearly 60 times 2009 earnings. The unbelievable growth of this company has largely been priced in with the significant premium investors pay versus the broad market.

While we are extremely impressed by Green Mountain Coffee Roasters performance in a tough growth climate, Ockham’s value investing methodology simply cannot recommend a stock with such a high price tag. We have the stock’s valuation as Overvalued currently, even though it might be a great buy after this sell off. This is one of those stocks that simply does not match up with our investing methodology, and outside of the price of the stock it is hard to find a flaw with this company’s performance over the last quarter that would inspire such a sell off.

Green Mountain Coffee Roasters: When Great is Not Enough

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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