Has Green Mountain Coffee Roasters Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, and then decide if Green Mountain Coffee Roasters (Nasdaq: GMCR  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Green Mountain Coffee Roasters.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

Five-year annual revenue growth > 15%

62.9%

Pass

 

One-year revenue growth > 12%

56.8%

Pass

Margins

Gross margin > 35%

33.3%

Fail

 

Net margin > 15%

9.5%

Fail

Balance sheet

Debt to equity < 50%

18.8%

Pass

 

Current ratio > 1.3

2.46

Pass

Opportunities

Return on equity > 15%

17.1%

Pass

Valuation

Normalized P/E < 20

11.36

Pass

Dividends

Current yield > 2%

0%

Fail

 

Five-year dividend growth > 10%

0%

Fail

       
 

Total Score

 

6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Green Mountain Coffee Roasters last year, the company has more than recovered from its score drop from 2010 to 2011 as it picked up two points. The stock, though, hasn't been so lucky, having lost fully three-quarters of its value over the past year.

Green Mountain has been one of the biggest success stories in retail in the past several years. The explosion of interest in its Keurig single-serve coffee machines has created a brand-new outlet for the industry, almost single-handedly supporting small companies Coffee Holding (Nasdaq: JVA  ) and Caribou Coffee (Nasdaq: CBOU  ) by providing a distribution mechanism in the form of its K-Cups.

But Green Mountain has faced attacks on multiple fronts. With its K-Cup patents expiring, competitors will no longer have to arrange lucrative licensing deals; SUPERVALU (NYSE: SVU  ) is among the many grocers set to release an in-house line of K-Cups. Despite its attempts to market a new patented brewer called the Vue, Green Mountain will have trouble luring existing customers to buy yet another machine. Moreover, with the new Verismo machine from Starbucks (Nasdaq: SBUX  ) coming to market, Green Mountain faces a big challenge to retain status-conscious customers.

Green Mountain isn't going down without a fight, though. With a promotional mail-order rebate, the company is encouraging sales of its brewers. Almost like a pharmaceutical company after its blockbuster drug goes off patent, Green Mountain is trying to compete on price in order to retain market share and brand loyalty.

For Green Mountain to improve, it needs to defend its impressive growth rates and sustain margins to the best of its ability. With the stock trading at such cheap levels, there's a lot of potential profit if the company can get past its challenges and find new ways to thrive in the much-changed coffee market.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfection than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

A short article can only scratch the surface of what's going on at Green Mountain Coffee Roasters. To get the entire story, let me encourage you to make a small investment of your own and sign up to receive our premium research report on Green Mountain. It'll give you the entire background of the company as well as strong investing takeaways. Click here and get your copy now.

Click here to add Green Mountain Coffee Roasters to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of SUPERVALU and Starbucks. Motley Fool newsletter services have recommended buying shares of Green Mountain and Starbucks, buying calls on SUPERVALU, writing covered calls on Starbucks, and creating a bear put spread position on Green Mountain. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (2)

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 October 09, 2012, at 2:06 PM, stanton43 wrote:

    Early reviews of the Starbuck Verisimo machine have been negative. It remains to be seen just how much of a competitor this item will be to GMCR.

  • Report this Comment On October 09, 2012, at 4:06 PM, CharlieTav wrote:

    Starbucks is desparate !!!

    - Their core business is retail brick and motor stores / high overhead and labor costs

    - Customers are Hotspot users / Airport / business districts / Convenience .

    - Because of the K-cup - knocks out convenience for retail stores

    - Because of 4 G - no need for Hotspot , can drink the K-cup and surf anywhere.

    - Because of Dunkin donuts - food and coffee

    Airport starbucks will survive

    Starbucks is in trouble and they know it. Their old business model will not work in the future. The rise of their stock in the last year has been supported by their sales of K-cups. They wil be faced with mass store closings in the future.

    Most single cup coffee machines in the past have not been sucessful except for Keurig Coffee Maker.

    The Verismo just might fail.

    One might think about shorting Sbux

    Long GMCR

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