Is Green Mountain Coffee Roasters a Good Choice for Investors Now?

Green Mountain Coffee Roasters (NASDAQ: GMCR  ) has experienced a significant daily rise of 19% on the market after it reported strong fourth quarter earnings results. At the time of writing, it was trading at nearly $70.60 per share; this is much higher than its price level when hedge fund manager David Einhorn revealed his short thesis on the company. Should investors follow David Einhorn and be bearish on Green Mountain Coffee Roasters, or should we invest in this stock after its strong fourth quarter results?

Better operating performance
In the fourth quarter, Green Mountain Coffee Roasters has managed to deliver 22% revenue growth. This was driven by brewer sales and good momentum in its portion packs. For the full year on a 52-week basis, the portion packs' revenue increased by 21% to nearly $2.64 billion, while brewers and accessories sales also enjoyed growth of 11% to nearly $750 million. During the fiscal year 2013, the total number of Keurig brewers sold reached 10.6 million.

Green Mountain Coffee Roasters' shareholders were excited because of the company's high free cash flow level. In fiscal year 2013, the company generated more than $600 million in free cash flow; this was much higher than last year's free cash flow of $76.7 million. The decent cash flow this year resulted from net profit growth, lower inventory levels and lower capital investment.

Although Green Mountain Coffee Roasters does not pay investors any dividend, it returned cash to shareholders via share repurchases. Since August 2012, the company has spent around $362 million to buy back 10.1 million shares at an average price of $35.82. As the company is trading at more than $70 per share right now, management has chosen the right time to buy back its shares. It does not stop there, either. Green Mountain Coffee Roasters has approved a new share repurchase program for a total amount of $1 billion, with a buyback yield of 9.5% on the current market capitalization of more than $10.5 billion. Income investors might cheer the fact that it also initiated an annual dividend of $1 per share. 

David Einhorn remains short
The impressive fourth quarter earnings results sent the share price of Green Mountain Coffee Roasters much higher, but David Einhorn still maintained his short position in the company. He considered it to be an "emotional stock." He still has doubts about the company's financial numbers and is pessimistic about the company's stock because Green Mountain Coffee Roasters has lost the patents on its K-Cup. This could lead to ongoing commoditization and price competition. 

Previously, Green Mountain Coffee Roasters had a good moat in the patent on its K-Cup. However, the patent expired in September 2012. Since then, around 26 new brands have entered this single-serve coffee business and have gained around 16% of the total dollar sales of K-Cups this year. 

Investors have reason to be bullish
Green Mountain Coffee Roasters could be still in a good shape with its renewed long-term partnership with the global coffee chain Starbucks (NASDAQ: SBUX  ) . Since the first partnership agreement was made in March 2011, Starbucks has shipped over 850 million Starbucks coffee K-Cup packs. Under the new five-year agreement, Starbucks will add more brands including Seattle's Best Coffee, Teavana Teas, and Torrefazione Italia for Keurig single-cup brewers. This new agreement will let Starbucks continue to leverage the growing Keurig brewer base in the North American market while Green Mountain Coffee Roasters benefits from Starbucks' huge global distribution channel and its brand assets. 

While Green Mountain Coffee Roasters was estimated to have as much as 60% of the market share in the single-serve coffee market, Starbucks ranked second with 18% market of the share. J.M. Smucker (NYSE: SJM  ) stood in third place, representing 16% of the total market.  J.M. Smucker's Folgers Gourmet Selection, one of its K-Cup brands, accounted for 80% of its 2013 total K-Cup revenue. This represented a 9% growth in sales for the second quarter of fiscal 2014. Moreover, the repeat purchase rates for this brand were quite strong. In order to grow the K-Cup business in the near future, J.M. Smucker will distribute K-Cups in new channels such as dollar class of trade and e-commerce. It also plans to launch three new varieties in the next year. 

My Foolish take
Investors were worried about Green Mountain Coffee Roasters when its patent expired. However, with the renewed long-term strategic partnership with Starbucks and its ongoing relationship with J.M. Smucker, it gives the company quite a strong foundation to move ahead. 

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  • Report this Comment On December 02, 2013, at 7:17 PM, MikeGronholm wrote:

    I think Einhorn is right. Owning a K-Cup® style brewer no longer means you need to use K-Cups. When Keurig first began selling K-Cup style brewers, the only option for brewing was the K-Cup. Then Keurig developed and marketed the My K-Cup, which was a reusable brew cup that allowed the use of any coffee grounds without using a K-Cup. It was, and is, pretty pricey, but allowed the Keurig owner another option than K-Cups. Soon, other reusable brew cup manufacturers, like ekobrew and Solofill entered the market. These brew cups we’re easier to use than the My K-Cup® and generally less expensive. Today, several new reusable brew cup manufacturers have entered the market and the cost of reusable brew cups has plummeted.

    In mid-2013, Single Cup Accessories, Inc. introduced its brew cup refilling system, which makes filling and cleaning K-Cup® style refillable brew cups easy, quick and clean, eliminating a major obstacle to reusable brew cup use.

    K-Cups are usually the most expensive brewing option for a given beverage and given the cost of packaging and shipping, probably will be for some time to come. In fact, K-Cup coffees can easily cost as much as $1.00. As Keurig owners become used to their brewers (and work through the K-Cups that came with the brewer) they will eventually be introduced to refillable brew cups. When they find that K-Cup style reusable brew cup, used with a brew cup refilling system, are nearly as easy to use as a K-Cups, it will be hard to go back to the expense of K-Cups. This is especially true when you can spend about $.26 to fill the brew cup with the same Starbucks coffee for which you would have paid $1.00 for a K-Cup.

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