Green Mountain Hammers Home Its Strength

Yesterday, Green Mountain Coffee Roasters (NASDAQ: GMCR  ) announced its second-quarter results, and the news was very good. Revenue was up 14%, and adjusted earnings per share jumped 45%, to $0.93. Analysts were only looking for $0.73 per share and, as a result, the stock jumped 24% by midday today.

The result also hammered home the turnaround that Green Mountain has undertaken since the company hit its 2012 low point. While the stock still isn't back to its all-time high, it's up an impressive 180% over the last 12 months.

The razor-and-blade model in action
Green Mountain's success came from the sharp increase in the number of single-serving packs that the company sold. Revenue from the packs was up 21%, to $794 million. Those sales come with excellent margins, and the shift in sales bumped gross margin up by 90 basis points. Overall, gross margin expanded by 590 basis points, up to 41.3%.

The quarter really hammered home the value of the Green Mountain model. Even if other brewers come out, even if people don't buy more machines, the single-serve packs keep selling. You bought the system, now you buy the coffee. The earnings off the back of that system "[demonstrate] the leverage inherent in [the] business model," as CEO Brian Kelley said on the earnings call.

The potential for growth
The extra benefit for investors is that people do like the systems. Green Mountain is forecasting an increase in installed systems of between 25% and 30% during 2013. Those customers will generate even more coffee sales, and should push margins even higher. The company is now expecting earnings per share for 2013 of $3.05 to $3.15, which is around a 30% increase from last year.

Green Mountain is also handily winning the single-brew coffee system war -- if that's even a real thing. The company's Keurig-branded machines should account for over 16 million installed systems by the end of the year. Starbucks  (NASDAQ: SBUX  ) hasn't released information on its installed systems, but the announcement that the company will continue to support the Keurig machines for the next five years indicates that Starbucks doesn't feel strong enough to rely simply on its own machine.

Overall, Green Mountain is continuing to make the right moves, and the business plan that it has in place seems to be paying off. While I was skeptical of the company for much of last year, I can't argue with the success that it has had over the last quarter. It looks like Green Mountain is here to stay.

Green Mountain is hitting new highs, but there may still be more for investors to tap into. You can find our recommendation for how to play the company in our 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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