Has Green Mountain Passed Its Peak?

Glance at a five-year chart for Green Mountain Coffee Roasters (Nasdaq: GMCR  ) , and you'll see why it's been an awe-inspiring performer for longtime shareholders. However, this week's quarterly results stirred up fears of weak and bitter brews in the coffee company's future.

Second-quarter net income surged 90% to $24.7 million, or $0.54 per share. Revenue rocketed 68% higher, to $324.9 million. Green Mountain was also able to improve gross margin to 33.4%, from 32.1% a year ago.

In more great news, the company said K-Cup sales were up 92%, while demand for its single-serve Keurig brewers is still going strong. It shipped 731,000 of the brewers, compared to 486,000 this time last year.

Green Mountain has been a highly caffeinated stock in recent years. Despite competition from usual suspects such as Starbucks (Nasdaq: SBUX  ) , Peet's (Nasdaq: PEET  ) , and Caribou (Nasdaq: CBOU  ) , and even the unusual likes of Dunkin' Donuts and McDonald's (NYSE: MCD  ) , Green Mountain has generated torrid sales and profit, as well as a surging stock price. Its stock is up 120% in 12 months.

Green Mountain also declared a 3-for-1 stock split. Savvy Fools know that stock splits don't really signify much, beyond creating a psychological impression that a stock is cheap.

But despite this quarter's aromatic earnings, Green Mountain's weaker-than-expected outlook left investors with a bitter taste in their mouths. The company said it now expects third-quarter earnings of $0.50 to $0.54 per share, well below analysts' estimates of $0.57. (Those figures are pre-split, by the way.)

Green Mountain's sliding stock price isn't too surprising, given the lackluster news. Shares are down about 26% from its 52-week high. As Buffalo Wild Wings' (Nasdaq: BWLD  ) recent precipitous stumble illustrates, premium-priced stocks tend to plunge on any whiff of disappointment. Green Mountain has long been a well-performing but premium-priced stock. With a price-to-earnings ratio of 49, it makes Starbucks look cheap at 26 times trailing earnings.

There's no reason for longtime shareholders to flip out and sell, but I wouldn't want to buy shares now, either. Even with the retreat in its price, I still say "buyer beware" on Green Mountain. It'd have to be a lot more reasonably priced to please my palate.

Green Mountain Coffee Roasters is a Motley Fool Rule Breakers selection. Starbucks is a Stock Advisor pick. Buffalo Wild Wings is a Motley Fool Hidden Gems recommendation. 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 (7) | Recommend This Article (14)

Comments from our Foolish Readers

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  • Report this Comment On April 30, 2010, at 4:51 PM, sas912 wrote:

    The earnings met the street expectations. However, this "disappointment" was brought about by a 9 cents per share cost to deal with a batch of defective Keurig brewers that sold at the end of 2009 and 10 cents per share allocated to the acquisition costs of the Deidrich deal and the Timothy's deal from late last year. According to the conference call, these expenses have already been incurred and are not expected to repeat in 3Q. But for those two items, earnings would have been 79 cents per share, handily beating the street. The warranty issue with the brewers may enable GMCR to recoup some of that expense from the vendor who made the defective part. The Timothy's acquisition closed in November of 2009 and the Deidrich deal is still open (the tender expires 5/2/2010).

    As for 3Q guidance being low, the reason for that is the anticipated expenses in the 3Q to ramp up manufacturing/roasting facilities so that they can meet the anticipated 4Q demand during the holiday season. That will increase their profit margins, and enable them to deliver into the demand.

    With the announced 3:1 split, the effective price for the shares is under $25/sh.

    I'm long in the stock, own it currently in my retirement account; I believe the company has a great product, with the DDRX acquisition it will control 75% of the K-cup market, and the company is clearly looking at expanding into other types of beverages. I bought more shares today just before the close.

  • Report this Comment On April 30, 2010, at 5:13 PM, sherry0256 wrote:

    I love the comments by both individuals but stock splits do make an impression of investors and the last time this stock split 2;1 it came right back to its original price within a few weeks. Just wait and see.

  • Report this Comment On May 01, 2010, at 12:03 AM, reggidmalc wrote:

    The Motley Fool has passed its peak based on more and more Cramer-like attempts to grab headlines.

  • Report this Comment On May 01, 2010, at 11:31 AM, kalb3 wrote:

    Agree w/all the comments.

    GMCR is a long term value proposition now, & I am holding it & adding on dips!

    Thanks to sas912. Did you get the drilled down info from Conference call transcript?

  • Report this Comment On May 01, 2010, at 12:54 PM, sas912 wrote:

    kalb3,

    Yes I now read through the cc transcripts or I listen in on the calls. Its the only stock I own that I actually understand, and I am a loyal consumer of the product! I am often surprised when I see the distortions from the pundits and "analysts" that make for great headlines. I would have preferred if mgmt had advised earlier of the warranty issue that was developing and I wish the split had been a 3:2 or a 2:1 as I think 3:1 was a bit aggressive, but I will now own 6000 on the split and since its a long term investment for me I am satisfied to hold.

    It is worth it to take 15-20 minutes to read the transcripts yourself if you invest in this stock as they are pretty straightforward if not as entertaining as the Berkshire Hathaway annual reports.

  • Report this Comment On May 01, 2010, at 1:18 PM, NHWeston102 wrote:

    While I don't share the uncharitable comments about Motley Fool, I agree emphatically with all else wisely said. I sold a lump of GMCR before the ka-boom and will await buying opportunities soonest. Like Sas912, this is the only stock I feel I really know and have been in and out of it since 1994. The profits I made on it drove our family's well-being during that period. I see lots of omproving prospects for GMCR, even once the bloom goes off the rose for the Kuernig. I know there are other skeptics - pay a visit to Minyanville to see one - but I've got a longer horizen. And, again, my analysis is grounded on one simple conviction - of all the companies named in your article, their coffee is superior to the lot [including THI]! Regards, friends.

  • Report this Comment On May 03, 2010, at 12:00 PM, sas912 wrote:

    GMCR announced that as of Friday 4/30/2010 it had substantially complied with the FTC requests relating to the DDRX acquisition and has now extended its tender offer to 5/10/2010 which is also the record date for the stock split.

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