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Can Green Mountain Climb Any Higher?

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Green Mountain Coffee Roasters (Nasdaq: GMCR  ) shares can cause major jitters, but its most recent quarterly results poured caffeinated joy for investors. Looking closer, however, those shareholders might want to switch to decaf.

First-quarter net income actually dropped 13.2%, to $12.5 million, or $0.27 per share. Excluding last year's favorable patent litigation settlement, though, earnings rocketed a stunning 163%. Green Mountain's most recent quarterly results were also slowed by $5 million in transaction expenses for its acquisition of Timothy's Coffees of the World.

The quarter's sales were roasting, surging 77% to $349.4 million. Green Mountain managed to increase gross margins by 200 basis points to 29.1% of sales, compared to 27.1% this time last year.

The quarter was good enough that Green Mountain also added a dime to the top and bottom ends of its earnings guidance for fiscal 2010, now estimated at $1.95 to $2.05 per share.

Although Starbucks (Nasdaq: SBUX  ) recently pointed to its VIA instant coffee packets as a popular alternative to one-cup brewing systems, it looks like Starbucks' success with that product hasn't slowed down the momentum for Green Mountain's Keurig brewer and associated K-Cup packs. Green Mountain said K-Cup portion pack shipments increased 82%, to 650 million. That's a sequential increase from 70% growth in the prior quarter.

Meanwhile, thanks to wider distribution deals in outlets such as Wal-Mart Stores (NYSE: WMT  ) , Green Mountain shipped 1.5 million Keurig brewers during the quarter, compared to 711,000 this time last year. That figure's also a massive jump from the 713,000 Keurigs sold in the prior quarter. Best of all, these massive sales position Green Mountain for fat future profits from the high-margin K-Cup pack business.

Green Mountain continues to defy rivals such as Starbucks, Caribou (Nasdaq: CBOU  ) , and Peet's (Nasdaq: PEET  ) . Its pending acquisition of Diedrich (Nasdaq: DDRX  ) -- having trumped Peet's offer -- should only provide further fuel for the company's growth.

I've often been bearish on Green Mountain over the years, given its premium stock price and acquisitive ways. Those sorts of purchases can be difficult to digest -- although in fairness, that strategy worked out well in Keurig's case -- and they make financial statements far more complicated for investors to peruse. Plus, its abundance of buyouts has weakened Green Mountain's balance sheet, decreasing cash by 58%, to almost $124 million in the quarter.

With its stock up more than 200% in the last year, Green Mountain trades at a forward price-to-earnings ratio of 44, trumping big-coffee rival Starbucks' forward P/E of 20. Despite its great results, I prefer stocks that are a tad less risky and pricey than Green Mountain is now, and I strongly suspect that investors should put down the coffee and walk away.

Are you thirsty for more from Green Mountain, or is its valuation too bitter for you to stomach? Sound off in the comment box below.

Pour yourself a double-serving of related Foolishness:

Green Mountain Coffee Roasters is a Motley Fool Rule Breakers pick. Starbucks is a Stock Advisor selection. Wal-Mart Stores is an Inside Value pick.Try any of our Foolish newsletters free for 30 days.

Alyce Lomax owns shares of Starbucks. The Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (13)

Comments from our Foolish Readers

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 January 29, 2010, at 3:13 PM, sas912 wrote:

    I have loved this company for many years even though when I sold my SBUX to buy GMCR people thought I was crazy. I thought the Keurig acquisition made sense in the business model and was confident that the holiday sales pushed by the Keurig machines would be very healthy. The Diedrich acquisition I was less thrilled with other than the fact that GMCR is apparently acquiring a roasting facility in California which helps them expand beyond the East Coast thereby increasing their market exposure, and this acquisition gives GMCR 3 of the 4 outstanding licenses for the K-cup technology which is I believe at the heart of the pursuit of Diedrich. Assuming that anti-trust laws do not crush this deal, GMCR will control 75% of the K-Cup market regardless of whose machine you brew on. That is where the money is right now.

  • Report this Comment On January 29, 2010, at 5:13 PM, MNTAG wrote:

    The future revenue from the sale of k-cups at a reported profit of $0.06 each coupled with the doubling of sales of the brewers sounds like the future is still bright even at 40 times current earnings. Only time will tell but today the charts look good and today the buyers are in control

  • Report this Comment On January 29, 2010, at 5:56 PM, JavaScotty wrote:

    Can anyone determine the last time that GMCR traded at a forward price-to-earnings ratio of 20? I'd be willing to bet it was a long, long, long time ago.

  • Report this Comment On January 29, 2010, at 6:18 PM, foolrleigh wrote:

    I have owned GMCR for the past ten years and have seen an intitial investment of $5,000 turn into more than $150,000. Although again and again I have been tempted to sell, I luckily haven't done so. This company ALWAYS beats estimates and provides a great coffee experience. While I wouldn't currently be buying GMCR at these current price levels, keep an eye on this one.

  • Report this Comment On January 30, 2010, at 6:30 AM, canndad wrote:

    You mention a drop in net earnings - and at least tried to explain it away on the Kraft litigation. This is typical. The margins slim to none on the Keurig brewer. This is what dilutes earnings. When you sell 1.5M brewers, earnings will become diluted. Happens in every earnings report for GMCR in the last 3-4 years because of the holiday sales on the Keurig. Why only 200% over the last year? It is much more than 200%!

    Yes, at some point the growth curve will change, but for the last 2 years, growth has been accelerating. I'll hold.

  • Report this Comment On January 30, 2010, at 2:00 PM, Rasko wrote:

    I have bought and sold both SBUX and GMCR twice each and made handsome money each time. For now I have a hold on both. There is still more upside to each. Btw--when people buy brewers, doesn't that mean they will soon be buying more k-cups, and lots of them? There is no real threat to Starbucks until GMCR makes a mobile roaster. Owning both the home market and the on-the-road market is actually quite quenching.

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