3 Reasons Green Mountain Coffee Roasters Could Prove Short-Sellers Wrong in 2014

Green Mountain Coffee Roasters (NASDAQ: GMCR  ) had an incredible year in 2013. The stock price was up 80% since the beginning of the year. Gains like that have caused some to turn bearish on the stock. However, despite a chorus of naysayers, the company's recent deal with Campbell Soup (NYSE: CPB  ) and weak sales of Starbucks' (NASDAQ: SBUX  ) Verismo could enable Green Mountain to push the critics aside and post even better performance in 2014.

Campbell Soup expands Green Mountain's brand offering
Green Mountain is a simple business: It manufactures and distributes single-serve brewers and single-serve K-Cups. It adds to sales of its own K-Cups by adding partners, like Starbucks, to manufacturing and distribution agreements. The partnerships make sense for Green Mountain; the company already manufactures and distributes its own branded coffee, so tacking on other brands adds extra revenue without significant overhead.

Green Mountain is expanding its universe of potential partners by adding Campbell Soup to its list of partners. Campbell Soup is the No. 1 soup brand in the United States; it sports a 60% share of the wet-soup market. The relationship is a great way for Campbell Soup to expand its offering and for Green Mountain to reach a customer base beyond that of coffee drinkers.

As the single-serve coffee market becomes more competitive, it will become even more important for Green Mountain to strike partnerships that diversify its offering; a more diverse offering would increase household penetration for the company's single-serve brewers and limit the competitive risks posed by any single category. If Green Mountain can strike similar deals with other companies -- say, Coca-Cola -- then the shorts may get clobbered.

Increase household penetration of Keurig Hot system
Green Mountain's leading single-serve brewer, the Keurig Hot system, is in 13% of U.S. households. The company runs national and regional advertising campaigns targeted to specific consumer segments and takes care in how its brewers are displayed in stores. It also targets food-service outlets -- a space that offers a long runway for growth because penetration sits below 1%.

Partnerships with Starbucks, Dunkin' Brands, and Campbell Soup do more than just provide additional revenue from portion-pack sales -- they also make the Keurig brewer more attractive relative to competing brewers. Starbucks' Verismo pods are incompatible with Green Mountain's Keurig and Vue brewers and vice versa. Brewer incompatibility means Green Mountain's relatively diverse selection is a legitimate competitive advantage.

A diverse selection is a durable competitive advantage only if it keeps Green Mountain's partners from offering products for the Verismo due to a lack of household penetration and keeps consumers from adopting the Verismo due to a lack of selection. If this turns out to be the case, then the bulls are sitting on an undervalued stock.

International expansion
Green Mountain has an enormous opportunity in international markets. Eighty-five percent of the company's fiscal 2013 revenue came from the United States -- the rest from Canada. In fiscal 2014, the company plans to expand to the United Kingdom, Australia, South Korea, and Sweden. Green Mountain's diverse selection -- it offers more than 200 licensed varieties -- may give it an edge over the competition when it expands internationally. Although still at the beginning of this opportunity, investors should monitor the quarterly filings to determine how much revenue growth to expect from international operations in the near term.

Bottom line
Over the last ten years, Green Mountain averaged an 11% operating margin and a 16% return on equity -- strong numbers that the company is working hard to sustain.. If Green Mountain can expand into new channels like it did with Campbell Soup, increase household penetration, and replicate its domestic success internationally, the company may be able to form a durable competitive advantage -- allowing it to sustain its outsized profits and send the stock soaring in the years ahead. As always, Foolish investors should do their own research before making any investment decisions. 

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