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Green Mountain Coffee Roasters Surges. Huh?

Every time I think about today's quarterly tidings from Green Mountain Coffee Roasters (Nasdaq: GMCR  ) , and then look at its surging stock price, it's hard for me to suppress one single, blaring thought.


Seriously, there's little to cheer about in Green Mountain's quarterly report, yet the last time I checked today, the stock was up 25%. Perhaps this can be explained by misguided euphoria or a short squeeze -- or both.

Green Mountain reported a 30% increase in third-quarter profit to $73.3 million, or $0.46 per share, plus a 21% increase in net sales. Green Mountain's earnings exceeded expectations a bit, while revenue came in weaker than expected. Furthermore, there are a few alarming things to consider here.

Never mind the top of the press release, where the company "refines" its 2012 outlook -- i.e., cuts it big-time. Somebody's missing the memo. There's a reason why the stock originally fell 12% last night in after-hours trading. Trading was even halted for a few minutes.

Most significantly, Green Mountain's 60% increase in inventories greatly outstripped its sales-growth increase. The excuse that it's stocking up for the upcoming holidays simply doesn't ring true to me, given the sluggish economy, skittish consumers, ugly 2012 outlook, and the competitive aspects I'll mention below.

Inventory surges are a red flag for stocks. Remember Crocs' (Nasdaq: CROX  ) fall from grace in 2008? An unsightly surge in inventories heralded trying times for the shoe company.

Maybe coffee and shoes don't much anything in common except that they target consumers, but these two companies have similar histories: They both were once high-growth stocks and investor darlings with insane multiples. (Years later, Crocs finally looks like a reasonable stock idea.)

Even more dangerously, Green Mountain is still under investigation by the Securities & Exchange Commission for its accounting practices, and allegations by skeptics like hedge fund manager David Einhorn and convicted-felon-turned-anti-fraud-crusader Sam E. Antar that the company has been playing fast and loose with its numbers should be enough to scare most investors off.

Last but not least, key K-Cup patents expire this fall, and important partner companies like Safeway (NYSE: SWY  ) and Kroger (NYSE: KR  ) recently said they plan to make their own branded single-serve coffee offerings -- for Green Mountain's Keurig and other single-serve brewers. That spells real potential trouble for the razor-and-blade model Green Mountain's been using for its Keurigs and K-Cups.

Want to play it safe? Stick with Starbucks (Nasdaq: SBUX  ) , which doesn't have nearly the same amount of sketchiness surrounding its stock. Although Green Mountain trades at eight times forward earnings -- far lower than Starbucks' forward P/E of 20 -- it is no value stock in my book. Investors who go for it now are pouring themselves a big cup of risk, and they might be in for a scalding spill.

Want some other thoughts on Green Mountain Coffee Roasters? Our consumer goods analyst has examined the key opportunities and risks facing the company. Claim your copy today by clicking here.

Alyce Lomax owns shares of Starbucks. The Motley Fool owns shares of Starbucks and Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended buying shares of Crocs, Green Mountain Coffee Roasters, and Starbucks. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended writing covered calls on Starbucks. 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.

Read/Post Comments (5) | Recommend This Article (5)

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 August 02, 2012, at 3:48 PM, pushkin9 wrote:

    Please, don't embarrass yourself with articles like this. There's a clear reason why the stock went up - it's valuation. 20% grower at 8x P/E is not that easy to find. The earnings were descent and the management call was very strong. Listen to the call. Good luck!

  • Report this Comment On August 02, 2012, at 4:25 PM, murph83 wrote:

    I own a little Green Mountain and I'm kind of with Alyce on this one. I think it dropped more than it should have after the last earnings report but was surprised at the huge rise today. When I saw the high inventory number, I cringed a little. Unless they ran out of inventory during the last holiday season, the reason doesn't make a lot of sense to me.

    While the rise surprised me, I do think the stock merits a PE above 8 and do not see it as overvalued.

  • Report this Comment On August 02, 2012, at 4:54 PM, USER2535 wrote:

    Pushkin9—please, don’t embarrass YOURSELF with punctuation like this.

    “There’s a clear reason why the stock went up – it’s valuation.”

    it’s = it is

    its valuation NOT it is valuation


  • Report this Comment On August 02, 2012, at 5:17 PM, pushkin9 wrote:

    USER2535, really? "it is" is exaclty what I meant.

    Let me spell it out for you:

    "There IS a clear reason why the stock went up - IT IS valuation. "

    jeffvandehey27: they explain the inventory on the call. they have to stock up for the Christmas quarter and it takes time to get ready with the logistic process from China for the Keurig machines. The inventory is also effected by the increase in green coffee prices (about $126.1 million increase is due to that). Again, I encourage everybody to listen to the call where all these issues are addressed in detail. Good luck to all!

  • Report this Comment On August 02, 2012, at 5:27 PM, pushkin9 wrote:

    Meant to type "exactly" and "affected" in case USER2535 decides to go after correcting those typos. :)

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