Let's Hold Green Mountain Bears Accountable

Stifel Nicolaus is spitting out Green Mountain Coffee Roasters (Nasdaq: GMCR  ) again.

Sticking to its earlier sell rating, the well-regarded firm is warning that Green Mountain's popularity may be peaking.

Channel checks at more than two dozen Big Lots (NYSE: BIG  ) locations across the country find some of the more popular K-Cup flavors selling for 25% off average retail prices. Even if coffee prices have started to come down since last year's frenzied surge -- off 37% since last May -- discounts aren't necessarily welcome. It's also not a very encouraging sign when your product finds its way into the clearance bins and closeout shelves of Big Lots. Right?

However, let's hold the bear accountable.

Stifling reality check
Back in December, Stifel's Mark Astrachan was also waxing bearish on the company. He saw shipments from Green Mountain's Chinese manufacturer declining by 5% in October and 28% in November, inconsistent with company claims that brewer demand remained strong. His channel checks at the time also showed increased brewer promotional activity, including a presence at dot-com discounter (Nasdaq: OSTK  ) . The analyst also argued that Green Mountain was losing market share to Starbucks (Nasdaq: SBUX  ) and that consumers were gravitating toward national brands over the regional favorites that Green Mountain had spent the past few years acquiring.

Astrachan's conclusion was that Green Mountain was in for a rough holiday quarter. How did that play out?

Well, revenue more than doubled to $1.16 billion during the three months in which Chinese imports were supposedly going the other way. Adjusted earnings more than tripled to $0.60 a share. What happened to the waning consumer demand? Green Mountain and its partners sold 4.2 million Keurig brewers during the quarter, and that's not too shabby, considering it sold 6.5 million brewers during the four previous quarters combined! What happened to the cascading margins one would associate with a shift to discounting? Profitability is growing faster than net sales.

Astrachan wasn't the only one who underestimated Green Mountain. The average analyst profit target for the holiday quarter was a mere $0.36 a share.

The skeptics simply forgot to consider that a presence at Overstock last year and Big Lots this year are ultimately signs of how mainstream Keurig's single-cup platform has become.

Holding the bulls accountable, too
Bears are entitled to their bragging rights. The stock has been pounded since topping out in the triple digits late last summer. Hedge fund superstar David Einhorn timed his bearish rant on Green Mountain perfectly.

Questions about the quality of Green Mountain's earnings and accounting practices, concerns about inventory levels, and fear over what will happen once its K-Cup patents expire in five months have outweighed the company's fundamentals.

Late last year Astrachan was targeting a profit of $2.38 a share out of Green Mountain in fiscal 2012. Today the consensus rests at $2.67 a share, and the most bearish of analyst forecasts is $2.40 a share.

Analysts see revenue soaring 61% and net income climbing 63% on a per-share basis this fiscal year ending in September. Bears remain comfortable shorting Green Mountain despite those projections, even though the stock is now trading at a forward earnings multiple in the mid-teens.

If fiscal 2013 is supposed to be Green Mountain's wake-up call, you wouldn't know it from Wall Street pros who are expecting revenue and profitability growing at 30% and 38% clips, respectively. And yes, these were the same cats who figured the company would earn a little more than half as much as it ultimately did during the holiday quarter.

Climbing the percolated wall of worry
A single dark cloud on the horizon is enough to suppress a hearty growth stock, and Green Mountain is heading into a storm. Between the looming patent expirations, Starbucks' entry into the single-serve coffeemaker market with an espresso-centric system, and many of Einhorn's still-valid concerns, Green Mountain is trading at a steep discount to its growth.

Does this mean that Green Mountain stock certificates will be selling alongside marked-down K-Cups at your local Big Lots? Don't bet on it.

If Green Mountain is able to continue silencing the critics who have been wrong in the past, it won't be long before investors ignore the naysayers in the future.

Brew ha ha
Shares of Green Mountain have popped nearly fivefold since I originally recommended the java heavy to Rule Breakers subscribers three years ago. It's clearly been a big winner for the growth stock newsletter service, but if you want to discover the newsletter service's next Rule-Breaking multibagger, a free report tells all. Check it out before it's gone.

The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters and Starbucks. Motley Fool newsletter services have recommended writing covered calls on Starbucks. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story, except for Green Mountain. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Read/Post Comments (7) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 18, 2012, at 10:43 AM, seasaw6499 wrote:

    Or maybe the bears were right, and Green Mountain just provided phony financials. It is very bizarre, and a mystery to me, why bulls always accept at face value the reports of the company, especially when the financial statements look very suspect.

  • Report this Comment On April 18, 2012, at 10:53 AM, Ffdanf wrote:

    (GMCR acquired Keurig in 2006 for about $104 million.)

  • Report this Comment On April 18, 2012, at 12:47 PM, danl24 wrote:

    Thank you for holding Mark Astrachan accountable for his biased analysis of data. You also should have mentioned that David Einhorn's "rant" was also biased and nothing he claims about GMCR's business should be viewed as accurate. David Einhorn's illegal activities have been well documented. The following article is just one example:

  • Report this Comment On April 18, 2012, at 2:21 PM, danl24 wrote:
  • Report this Comment On April 18, 2012, at 4:07 PM, LQM2 wrote:

    Regarding "phony financials", the SEC investigated that rumor over a year ago. GMCR restated with essentially immaterial changes. The possibility that the SEC was bamboozled all this time is so remote to be ridiculous.

  • Report this Comment On April 19, 2012, at 11:13 AM, amserv wrote:

    "The possibility that the SEC was bamboozled all this time is so remote to be ridiculous."

    Your quote sounds like something Bernie Madoff supporters would say.

    And isn't the investigation still open? Either the SEC is criminally incompetent while causing unnecessary uncertainty or they're drilling deeper.

    Great article, well researched and unbiased.

  • Report this Comment On May 03, 2012, at 3:11 PM, DividendsBoom wrote:


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