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Is Green Mountain Doomed?

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Green Mountain Coffee Roasters' (Nasdaq: GMCR  ) explosive revenue growth over the past year has intrigued many investors. In its last quarter, this Vermont-based company's revenues more than doubled, and earnings per share have jumped higher. Green Mountain is set to report its earnings early next month, and it looks as though its explosive growth is set to continue.

Analysts expect its revenues to increase by 50%, with EPS set to grow by a pretty impressive 33%. However, one thing that has truly made this stock stand out is its roller-coaster ride in the stock market. The stock hit an all-time high of $115.98 last year but since then has fallen to the mid-40s. So, what's the reason for the bearishness surrounding the stock? Was Green Mountain's growth just a fluke, or can it prove us wrong with its next quarterly report?

Fear Starbucks!
Starbucks' (Nasdaq: SBUX  ) announcement that it will enter the single-serve coffee market is just one of the bearish factors. The news sent Green Mountain's shares down 24%. We know that Green Mountain has dominated this business for a while now, but the world's largest coffee purveyor's advent is definitely a point of concern.

However, although it was feared that Starbucks' brewer, christened the Verismo, would grind away at Green Mountain's leading market share, Starbucks is looking to build on its relationship with Green Mountain as well. The two are looking to increase their partnership through which Starbucks will sell its single-serve coffees for the Green Mountain Vue brewer. Whatever the case may be, it doesn't change the fact that Starbucks will still enter the single-serve market, even though Starbucks claims that Verismo is a high-pressure brewer, compared with Green Mountain's low-pressure Keurig brewer.

So the threat may not be real, as Starbucks CEO Howard Schultz says the Verismo is intended to directly compete with Nestle's coffee machine. But it's still a factor that can't be ignored.

Expiring rights
Even if we partly discount the Starbucks factor, what's really worrying is that Green Mountain's K-Cup patents are set to expire in a few months.

The good thing for Green Mountain at the moment is that it has contracts in place with the likes of Starbucks and Caribou Coffee (Nasdaq: CBOU  ) for production of these companies' products in its K-Cups. Last year, it entered into a deal with Dunkin' Donuts (Nasdaq: DNKN  ) to sell K-Cups under the doughnut maker's brand name. The point is that when Green Mountain's patents expire and these contracts have run their due course, there's no stopping rival coffee makers from creating imitating pods that'll fit into the Keurig brewer -- which effectively means that there would be nothing to protect Green Mountain any more. So it's possible that the K-Cups' success may indeed be short-lived.

One thing that might work in its favor is Green Mountain's new high-end brewer, the Vue. But then again, whether Vue can enjoy the same level of success as the Keurig brewer is something that remains to be seen. It's more expensive and relies on a new, less used pod design.

Are these profits real?
Although Green Mountain has been raking in profits, its free cash flow has been in the red for the past five years.

Fears of falling revenue, increasing competition, and negative free cash flow don't really make for the best read. Green Mountain certainly has a lot to prove, though maybe it can prove its doubters wrong with its upcoming quarterly results.

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Fool contributor Shubh Datta doesn't own shares in the companies listed above.   The Motley Fool owns shares of Starbucks and Apple. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters, Applem and Starbucks, creating a lurking gator position in Green Mountain Coffee Roasters, writing covered calls on Starbucks, and creating a bull call spread on Apple. The Motley Fool has a disclosure policy. We Fools don't 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.

Read/Post Comments (3) | Recommend This Article (4)

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 26, 2012, at 2:55 PM, danl24 wrote:

    Though the article is a summary of points that investors should consider, the headline is misleading and sensationalistic. There is no mention of the fact that GMCR contracts with Dunkin' Doughnuts and Starbucks are for several years, so there is no possibility that these companies are going to start making their own K-Cups anytime soon. The infrastructure needed to make K-Cups in amounts that would meaningfully erode GMCR market share would cost 10's of millions of dollars. Until we see a company spending that kind of money on plant and equipment, competition will be insignificant. Starbucks has already stated they have no intention of spending any capex on Verismo, so there's no way they are going to spend it on ramping up K-Cup production.

  • Report this Comment On April 26, 2012, at 11:52 PM, lowmaple wrote:

    Verismo may not compete directly with K-cups but if 5 million people have a Verismo drink. they probably won't be drinking a K cup with the other hand.

  • Report this Comment On April 26, 2012, at 11:54 PM, lowmaple wrote:

    However that wont't affect the coming quarter's profit.

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