Is Green Mountain Coffee Roasters Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Green Mountain Coffee Roasters (NASDAQ: GMCR  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Green Mountain's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Green Mountain's key statistics:

GMCR Total Return Price Chart

GMCR Total Return Price data by YCharts.

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

221.2%

Pass

Improving profit margin

89.2%

Pass

Free cash flow growth > Net income growth

569.4% vs. 507.8%

Pass

Improving EPS

458.8%

Pass

Stock growth (+ 15%) < EPS growth

142.9% vs. 458.8%

Pass

Source: YCharts. *Period begins at end of Q3 2010.

GMCR Return on Equity (TTM) Chart

GMCR Return on Equity (TTM) data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

60.5%

Pass

Declining debt to equity

(87%)

Pass

Source: YCharts. *Period begins at end of Q3 2010.

How we got here and where we're going
Green Mountain comes through with flying colors in its second assessment, earning a rare perfect score on this test, which is a big boost from last year's already-strong five passing grades. Green Mountain has posted staggering growth rates over the past three years, resulting from higher volumes and lower input costs. Thanks to this profit surge, the company's also improved its equity and debt metrics significantly, which boosted investors' confidence and fueled stock growth at a rapid clip. This is a great performance, but can Green Mountain continue to outperform in the future? Let's dig a little deeper to find out.

Green Mountain Coffee Roasters' shares have rallied more than 90% in the past year, thanks to the Keurig hot brewer system and some highly lucrative manufacturing and distribution agreements with Starbucks (NASDAQ: SBUX  ) and Dunkin' Brands (NASDAQ: DNKN  ) . Fool contributor Ted Cooper notes that Starbucks has extended its partnership with Green Mountain, under which the latter will distribute single-serve K-Cups with Starbucks-owned brands, including Teavana, Seattle's Best Coffee, and Tazo teas. Furthermore, Green Mountain enjoys a legitimate competitive advantage over Starbucks, whose Verismo pods are incompatible with Keurig and Vue brewing systems. Green Mountain's partnership with Dunkin' should also drive further profits -- the single-serve coffee market is growing nine times faster than the rest of the coffee industry.

Quite recently, Green Mountain announced a deal with Campbell Soup -- the top soup brand in the United States -- which will allow Green Mountain to reach customers beyond the traditional coffee market and expand its product portfolio. Ted points out that it is imperative for Green Mountain to sign up a number of new partnerships, as the single-serve coffee market has been becoming far more competitive over the past few quarters. However, Green Mountain has been planning to launch the Keurig system in Australia, South Korea, Sweden, and the United Kingdom, which could allow it to capture a major new customer base in other developed markets. Fool contributor Connor Foreman notes that the company is gearing up to launch the Keurig 2.0 brewer, which is configured to brew only Green Mountain licensed packs.

Fool contributor Eileen Rojas notes that Green Mountain's green coffee costs improved by 380 basis points last year, and this should continue to drive margins higher in 2014. In addition, the company is trying to convince several other private-label sellers in the market to become licensed partners. Green Mountain also plans to buy back $1 billion worth of shares after it finished the $140 million stock repurchase remaining under its earlier buyback plan. However, Green Mountain may face stiff competition from Panera Bread, which has recently inked a packaging and distribution deal for its single-serve cups with Distant Lands Coffee. Treehouse Foods has also developed its own brand of K-Cup, which could take away some of Green Mountain's market share and push K-Cup prices down.

Putting the pieces together
Today, Green Mountain Coffee Roasters has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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