Is Green Mountain Coffee Going to $106?

These have been caffeinated days for Green Mountain Coffee Roasters (NASDAQ: GMCR  ) investors. Shares of the company behind the Keurig platform of single-serve coffee have nearly quadrupled since bottoming out two summers ago, and this week's developments have been encouraging.

Williams Capital Group raised its target on the stock this week -- all the way up to $106 -- and that followed CNBC's Jim Cramer offering up a bullish perspective during Mad Money's lightning round.

"I like it," Cramer said during Monday's show after discussing blowout results in its most recent quarter. "I know it's controversial, but I think they're looking at another good quarter." 

The problem is that Green Mountain isn't really looking at a strong holiday quarter. It actually provided disappointing guidance last month. Despite delivering market-thumping results on both ends of the income statement for its fiscal fourth quarter for the year ending in September, the Keurig King was surprisingly somber in its near-term outlook.

Green Mountain sees revenue climbing in the low-to-mid single digits for the seasonally potent holiday quarter. It sees margins continuing to expand -- something that java bellwether Starbucks (NASDAQ: SBUX  ) has also experienced as retail prices haven't fallen to match the drop in coffee-bean costs -- but the 12% to 18% in earnings growth fell well short of where analysts were parked. Wall Street was hoping for a profit of $0.96 a share at the time, and Green Mountain's guidance calls for just $0.85 a share to $0.90 a share in net income for the period.

This is a Green Mountain-specific slowdown. Starbucks didn't offer any kind of dreary outlook. In fact, analysts see the baron of baristas growing its sales 13% during this quarter. After years of seeing Green Mountain grow faster than its K-Cup partner Starbucks, we're now seeing the retail coffee chain leading the way in terms of top-line growth.

A good reason for the bounce after an admittedly mixed quarterly report last month was that Green Mountain had 41.8 million shares sold short as of mid-November. That is the highest level of short interest that Green Mountain has experienced all year, so we went through a classic short squeeze. Green Mountain initiating a dividend last month was a brilliant strategy in helping shake out some of the penny-pinching naysayers betting against the company. We'll know next Tuesday how many shares of Green Mountain were sold short at the end of December, but it will likely confirm the short squeeze by dropping substantially. That's fine, but what will Green Mountain do now that the short squeeze is complete and even the company concedes that third-party K-Cup suppliers are eating into its business?

The good news for those long on the stock is that Green Mountain sees growth accelerating after the holiday quarter to kick off fiscal 2014. It sees revenue growing in the high single digits for the entire year ending next September. It's also eyeing earnings growth in the low double digits. Naturally we'll have to see if Green Mountain still stands by that acceleration at the end of this quarter. Its projections have been spotty in recent years, and that should temper enthusiasm alongside the drying up of short interest. The big gains may be over for now, but that doesn't mean that the pessimists will win the next round.

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  • Report this Comment On December 09, 2013, at 4:31 AM, RobertBrad wrote:

    Green Mountain Coffee Roasters hit rock-bottom in July last year, when its stock price touched $17.57. Share prices had been falling since 2011, after the Securities and Exchange Commission had initiated an inquiry in the coffee brand’s accounting practices.

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