Can Green Mountain Coffee Bounce Back?

It wasn't exactly cool beans for Green Mountain Coffee Roasters (NASDAQ: GMCR  ) investors last week. Shares of the company behind the Keurig single-cup brewing system tumbled 10% as Whole Foods Market (NASDAQ: WFM  ) moved to offer its own refills for Green Mountain's platform.

Whole Foods isn't the first grocer to go the private-label route. Several supermarket chains have been introducing their own K-Cups since Green Mountain's patents on the portion packs that fuel its Keurig coffee systems expired 13 months ago. But the market was somehow spooked by Whole Foods Market's move. If the K-Cups are a hit, Whole Foods would prove that you don't need to partner with Green Mountain the way that Starbucks (NASDAQ: SBUX  ) and so many other java heavies have over the years.

But that assumption is based on the fallacy that Starbucks is stupid for not only partnering with Green Mountain but also for expanding and extending that partnership earlier this year. Starbucks knew what it was doing then and it knows what it's doing now. Green Mountain offers not only access to its self-marketed efforts but also a gateway to the new Keurig platforms that are still under the umbrella of patent protection. 

Green Mountain estimates that just 10% to 11% of all K-Cups sold are coming from companies that aren't affiliated in one way or another with Green Mountain. Third-party data shows that number may be closer to 16%, but the fact remains that it's the undisputed top dog here. There's a reason Green Mountain continues to post double-digit revenue growth in a world where anyone can now legally make a portion pack that fits inside the original Keurig brewer.

But Green Mountain has been approaching the renegades, setting itself up as a viable provider of private label brews. It points out that it offers quality control so tangible that all 10 of the most reordered brands are associated with Green Mountain. There's also the appeal of being on friendly terms with Green Mountain as it uses its brand to roll out new systems with new portion-pack specs. It probably won't be enough too woo anybody, but clearly it's been a convincing enough argument to get Starbucks to play along.

Another thing that may hold back the appeal of Whole Foods Market's own K-Cups is that they are not cheaper than most of Green Mountain's own brands. Isn't the nature of house brands -- even at Whole Foods -- lower prices?

We'll see how this plays out, but analysts continue to see healthy growth at Green Mountain through the next few years. The stock has still nearly quadrupled since bottoming out last summer, but this pullback offers a chance to get in on one of the more misunderstood growth stocks selling at a reasonable multiple in the teens based on this new fiscal year's analyst targets.

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