Can Green Mountain Coffee Ever Bounce Back?

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Things certainly don't look good for coffee maker Green Mountain Coffee Roasters (Nasdaq: GMCR  ) , which is still reeling from the expiration of its K-Cup patents, the rise of competition flooding the market with low-cost pods, and the lingering concerns about its accounting practices. The coffee specialist lost two-thirds of its value since hitting a high back in February as the evidence against its ability to maintain its growth story mounted.

Though I've been bearish on the stock for years I finally rated it last year on Motley Fool CAPS to underperform the broad market indexes. I figured it was time to hold myself accountable for the bearish calls I had been making, and the 180,000-member-driven investor community that translates informed opinion into stock ratings of one to five stars is the means for letting readers follow that CAPScall.

Smaller slice, bigger pie
Yet last month I admitted that Green Mountain would continue to dominate the world of single-cup coffee brewing. Its Keurig machine is the best-known brand out there and it has millions of loyal fans who will remain so. A National Coffee Association study said that 7% of respondents owned a single-cup brewer and that the number was growing by 1% a year.

Regardless of everyone from Starbucks (Nasdaq: SBUX  ) to Kraft (Nasdaq: KRFT  ) bringing to market their own machines, the Keurig ought to remain the dominant brand.

It introduced its new, more expensive (and newly patent-protected) Vue machine and last quarter noted it sold $20 million worth of them, twice as many, according to the market researchers at NPD Group, as any other similarly priced coffee brewer. Of course, the caveat is that it's among the brewers that carry equally high price tags; lower-cost ones are now breaking into the top 10 and we'll likely see them climb higher in the rankings. Wal-Mart (NYSE: WMT  ) will soon start selling a machine made by Esio Beverage that makes both hot and cold drinks.

One lump or two?
All this is beginning to take a toll. Previously, Green Mountain said it might raise prices on its high-end brewers to protect its margins, but instead it's actually cut them, no doubt as it tries to maintain market share. With the holidays approaching, expect the coffee maker to get even more promotional.

Yet it was never with the machines that Green Mountain was looking to make its money. It typically sold its Keurigs in a razor-and-blades fashion, selling them at cost and making outrageous profits on the pods. Despite dozens of partnerships for its coffee, including with Starbucks, Dunkin' Brands, and Caribou Coffee, discounted pods are now filling the shelves of discounters like Wal-Mart and Costco as well as supermarket chains like Kroger and Safeway.

It's a tsunami building up out at sea that will soon wash over Green Mountain. It may just end up being the big fish in a bigger pond where pricing and margins come under pressure. Even at its severely discounted price it's hard to recommend its stock, as the waves are only just starting to break on its shores.

Scarcity of value
With Green Mountain at under 10 times earnings estimates and priced at just about the same as its sales, investors may think it's cheap. However, sometimes stocks are low-priced for a reason, and I think Green Mountain Coffee Roasters offers several reasons that it's depressed. It's been years since the brewer's generated any free cash flow, and the outlook for it to do so in the immediate future doesn't seem bright.

As I mentioned earlier, I rated Green Mountain to underperform the market indexes and I don't see any reason to change that decision. So far, the stock has been cut in half since I weighed in on it, compared to a 13% rise in the S&P 500. There's a long way to the bottom yet for this stock.

Admittedly, Green Mountain Coffee Roasters investors are passionate about their company, and you can let me know in the comments box below whether you disagree with my assessment that it will be unable to perk up its stock anytime soon

Ready for a rubber match
With Green Mountain as cheap as it's ever been, many investors are wondering whether this is the end of the former market darling, or the perfect entry point for an enormous rebound. While I suspect it's the former, there are others who predict the latter. You can find out the Motley Fool's recommendation for how to play the company in its new premium research report. In it you'll find everything you need to know about Green Mountain, including whether it's a buy at today's prices. Click here for instant access.

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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 26, 2012, at 9:18 PM, cubanpp wrote:

    This article only based the author's opinion. Earnings are based on facts including tangible numbers, next earnings will be strong and the stock price will surge follow by a short squeeze. I am long GMCR in a bad economy people rich and poor drink coffee, America was made with coffee. GMCR up we go!!!

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