Can Green Mountain Stage a Comeback?

It's been a tough couple of weeks for Green Mountain Coffee Roasters (Nasdaq: GMCR  ) . The stock dipped as much as 10% on Friday after Stifel Nicolaus cut its earnings estimate for the brewer in fiscal 2013. Analysts are worried that growing competition in the space will chip away at Green Mountain's market share, and ultimately crimp earnings. But this is nothing new.

Stifel analyst Mark Astrachan lowering his earnings forecast for Green Mountain is simply a new twist on an old story.

Investors have known for years now that the company's patents on its K-Cup technology are due to expire in September. In fact, risky competition has been brewing since March when rival coffee retailer Starbucks (Nasdaq: SBUX  ) unveiled its Verismo single-cup coffeemaker. Starbucks' new espresso-type coffee machine is expected to hit stores this fall.

America runs on K-Cups
To be fair, Green Mountain has always had a tricky business model. Championed as the creator of single-serving Keurig coffeemakers, Green Mountain sells the appliances at very low margin. But until recently, that has worked well for the company because it makes the big bucks on sales of its high margin K-Cup refills -- which cost customers around $0.75 apiece.

Both Starbucks and Dunkin' Brands (Nasdaq: DNKN  ) have licensing deals with Green Mountain for its popular K-Cup line. The Seattle-based brewer sold more than 103 million Starbucks branded K-Cups in the three-month period ended December 2011. In a similar deal, Dunkin' signed a distribution agreement allowing it to self-brand and sell K-Cup portion packs nationwide.

These agreements were a positive for the K-Cups king in the short term, although in the bigger picture Starbucks and Dunkin' were the real winners as it gave them an entry point into the booming single-serve segment.

Challenges mount
With patents soon expiring on its Keurig brewing system, why would rivals like Starbucks and Dunkin' continue to pay royalties to Green Mountain when they can just as easily make and sell their own cups for use in these machines? As harsh as the reality may be, we knew this day would come.

In any industry, one company's success will inevitably lead to increased competition in the space. For Green Mountain, it's unfortunate that the rivalry came sooner rather than later. Even grocers are getting in on the action.

Safeway (NYSE: SWY  ) last month started selling its private-label coffee pods, which also work in Green Mountain's Keurig machines. According to Reuters, Kroger is also jumping into the premium single-cup segment with plans to make and distribute its own supermarket branded cups.

The problem is that these guys can afford to sell their unlicensed refill cups at a fraction of the cost that Green Mountain does. Safeway already offers its Safeway Select cups for $0.58 each, which is $0.17 less than rival K-Cups. While there is no denying the challenges this raises for Green Mountain, I think there's still plenty of opportunity left for the company in the multibillion-dollar coffee industry.

Your caffeine fix
In a panic to sell shares of the coffee roaster, investors seem to be missing some key factors. Let's not forget that Green Mountain currently controls more than three-quarters of the single-serve coffee segment. That's a niche that isn't going away overnight.

Additionally, Green Mountain still has ongoing licensing deals with Starbucks, Dunkin' Brands, Caribou Coffee (Nasdaq: CBOU  ) , and Folgers. So far, these continued relationships with major coffee retailers have helped Green Mountain maintain its momentum in the sales of K-Cups.

Shares of Green Mountain are down more than 60% year to date. However, the stock certainly isn't overpriced compared to its coffee peers.

GMCR PE Ratio Chart

GMCR PE Ratio data by YCharts

Wait it out
Current shareholders would be wise to sit tight until the company reports earnings next month. Investors will get a better read on the financial health of the company during its quarterly conference call, which is scheduled for Aug. 1. Given the numerous headwinds facing Green Mountain Coffee Roasters, this stock is not for the faint of heart.

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Fool contributor Tamara Rutter owns shares of Starbucks. Follow her on Twitter, where she uses the handle @TamaraRutter, for more Foolish insights and investing advice. The Motley Fool owns shares of Green Mountain Coffee Roasters and 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. Motley Fool newsletter services have recommended writing naked calls on Dunkin' Brands Group. The Motley Fool has 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.


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

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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 July 18, 2012, at 4:25 PM, laboogie wrote:

    The patents that expire in September are a non-issue. They were the original patents that have since been improved. The patents that matter do not expire until 2020. Please do thorough research before presenting information.

  • Report this Comment On July 19, 2012, at 12:40 AM, lowmaple wrote:

    GMCR looks to me like it is selling commodities.

  • Report this Comment On July 20, 2012, at 1:32 PM, wgreystone wrote:

    IMHO, Coffee is not comodities. People are willing to pay for premium coffee (think if Starbucks).

    If "Safeway Select" can be a great threat, then all the other food categary brands should have disappeared already. It's only for people who can't afford the branded products, but what's the percentage of those people who actually own K-cup brewing systems.

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