Green Mountain Coffee Roasters
Today, let's look at three things investors should be watching regarding Green Mountain Coffee Roasters, as they'll provide us better insight into the company.
1. Inventory levels
Possibly the biggest gripe Wall Street analysts and investors have had with Green Mountain is its reckless levels of spending on new inventory despite not truly understanding the proper level of demand from its customers. That doesn't mean Green Mountain hasn't grown its business, because net sales screamed higher by 37% in its latest quarter over the prior year. But what's concerning is that expenses have been rapidly rising and inventory levels have grown in five of the past seven quarters.
Poor inventory management will negatively affect Green Mountain's margins (as it will profit less from each dollar taken in), and it shows poor forecasting and understanding of the underlying coffee demand and trends. This is somewhat similar to what happened to Krispy Kreme Doughnuts
2. What's the competition doing?
Unlike health care, where new and innovate technologies and medicines can cause one company to leapfrog another, the coffee sector is pretty straightforward. That doesn't mean Green Mountain isn't introducing new blends of coffee or trying to better its Keurig single-brew system, but it does mean that keeping an eye on what its competition is up to is pretty easy.
One factor to keep an eye on is the partnerships Green Mountain has set up with the nation's largest coffee chain, Starbucks
It's also worth mentioning that of the 37 patents that Green Mountain owns, two very key patents regarding its K-Cups are set to expire in September, which could quickly expose the company to added competition.
3. Coffee prices
I know what you're thinking: "Duh!" It should go without saying that as a shareholder of any coffee company, you should be closely monitoring coffee prices, but everyone could use the reminder every once in a while -- even corporate executives.
Coffee Holdings (AMEX: JVA), the coffee roaster that took the market by storm last year, reported a dismal loss in its latest quarterly report, which it blamed on lower coffee prices and customer deferrals on orders on the expectation that prices would head even lower. Not surprisingly, Green Mountain is Coffee Holdings' largest customer.
Since last September, coffee prices have fallen from roughly $2.90 per pound to as low as $1.50 per pound within the past two weeks. Although this could eventually be a bullish sign for consumers who purchase coffee for home consumption and should release inflationary pressures from coffee chains like Starbucks and Dunkin' Brands, it could be bad news for roasters and put further pressure on Green Mountain's margins. Let's remember, because of its large inventory it's likely that Green Mountain's purchases came at much higher prices. Monitoring coffee prices once again relates to understanding consumer trends and demand, which is a crucial factor in Green Mountain's success.
Now that you know what to watch for, it should be easier to analyze Green Mountain Coffee Roasters' successes and pitfalls in the future, and hopefully you'll gain a competitive investing edge.
If you're still craving even more info on Green Mountain Coffee Roasters, I would recommend adding the stock to your free and personalized Watchlist so you can keep up on all of the latest news with the company.
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Fool contributor Sean Williams has no material interest in any of the companies mentioned in this article. Starbucks is his second home. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of Starbucks and Costco. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters, Costco, and Starbucks, as well as writing covered calls on Starbucks, writing naked calls on Dunkin' Brands, and creating a lurking gator position on Green Mountain Coffee Roasters. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy that'll never give you indigestion.