479,000 More Reasons for Starbucks to Worry

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"Am I the only one really optimistic?" I asked on the Green Mountain Coffee Roasters (Nasdaq: GMCR  ) discussion board for Motley Fool Rule Breakers subscribers, five hours before the company delivered its fiscal-second-quarter results.

I laid out my thesis:

  • Wall Street had lofty expectations -- targeting a quarterly profit of $0.36 a share over the $0.23 a share Green Mountain earned a year ago -- but analysts have been underestimating the company for a while. Green Mountain topped estimates in each of the last five quarters, completely obliterating analyst projections in the three previous periods.
  • The company moved 711,000 K-Cup brewers over the holiday quarter, a 121% spike over the previous holiday season. "These aren't treadmills that collect dust come mid-January," I wrote on the board yesterday morning. "Folks are going to be ordering a ton of K-Cup refills."
  • We have also become a more home-centric nation of consumers during this recession. That's evident in the speedy growth of Netflix (Nasdaq: NFLX  ) and (Nasdaq: AMZN  ) , as they cater to penny-pinching couch potatoes. Green Mountain is a natural fit, setting java junkies back about $0.40 for a K-Cup portion pack, compared to the $2-$3 they would be spending for a similar serving of coffee at a swanky java joint.

I was cocky, but I was right.

The stock that I recommended to Motley Fool Rule Breakers subscribers two months ago took off last night, after the company delivered another blowout quarter. Sales soared 60%, to $193.4 million. Earnings more than doubled to $0.50 a share. The company sold 432 million K-Cup refills during the period, with Green Mountain profiting from its own brands and collecting royalties from everyone else.

Can it get any better? Sure. In fact, it probably will. The company moved 479,000 more Keurig single-cup brewers during the quarter, a 148% increase over last year's throughput. It sells them basically at cost. The real gravy comes in the K-Cup refills, which are perpetual purchases after a coffee fan spends $80 to $300 on a Keurig appliance.

In other words, there are another 479,000 people, families, or companies invested in replacing premium brews, such as that served by Starbucks (Nasdaq: SBUX  ) , with a cheaper and more convenient solution. Green Mountain also struck a distribution deal with the world's largest retailer; Wal-Mart Stores (NYSE: WMT  ) will begin stocking an entry-level Keurig brewer and K-Cup portion packs this week at roughly 3,000 of its locations. 

Green Mountain is naturally bumping up its guidance for all of fiscal 2009. It sees net sales climbing 58% to 61%, versus the 43% to 48% improvement it was predicting just three months ago. It expects to post a profit of $1.47 to $1.53 a share this fiscal year, roughly $0.20 higher than its previous bottom-line outlook.

Bears will argue that Green Mountain is no bargain, closing yesterday at 35 times this year's projected earnings. However, it's also growing its profits at roughly twice that rate. Of course, the stock is up big -- nearly 40% -- in today's trading, which places more fuel on the bears' fire.

Between Wal-Mart broadening the brand's retail footprint and its recently completed Tully's acquisition, which give the company a bigger West Coast presence, Green Mountain is living up to both the "green" and "mountain" parts of its moniker.

Some other Green Mountain sips:

Green Mountain Coffee Roasters is a Motley Fool Rule Breakers selection. Amazon, Netflix, and Starbucks are Stock Advisor recommendations. Starbucks and Wal-Mart are Inside Value picks. The Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz can actually walk to three Starbucks from his home, but he's still not much of a coffee sipper. He's had a Keurig brewer in his home for two years now. He does not own shares in any of the companies in this story, save for Netflix. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool's disclosure policy is switching to decaf.

Read/Post Comments (2) | Recommend This Article (7)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 01, 2009, at 1:18 PM, agent86wm wrote:

    As a coffee junkie myself I considered buying a k-cup brewer, the issue that changed my mind was location. Should I have a brewer at home or at work? getting one for each location is pricey.

    Instead I settled for the more elegant solution, I have been buying the Starbucks Via packets.I can brew a cup at home, at work, on the airplane, heck anywhere I can get a cup of hot water! I have tasted both products and the Starbucks is a better cup of coffee.

    Because I hope my fellow Fools are not fooled by the k-cup hype, I feel in the long term the Starbucks solution to coffee on the go will be the better financial option.

    Also in a time when "green" is the big business mantra, has anyone thought about what 480,000 coffee brewers will look like in a land fill when the novelty wears off?

  • Report this Comment On May 02, 2009, at 3:17 PM, reggidmalc wrote:

    AgentSBUX, don't knock something you have not tried. We have 3 Keurigs in our B&B in each suite ...and the guests love being able to brew a fresh cup of whatever flavor they are in the mood for any time. No waste, no cleanup, great coffees, teas and cocoa. Order K-cups online. Razor and blade business model with viral word of mouth marketing. Expansion just beginning. Brewyah!

    Does SBUX also make instant KoolAid?

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