It's been a tough couple of weeks for Green Mountain Coffee Roasters
Stifel analyst Mark Astrachan lowering his earnings forecast for Green Mountain is simply a new twist on an old story.
Investors have known for years now that the company's patents on its K-Cup technology are due to expire in September. In fact, risky competition has been brewing since March when rival coffee retailer Starbucks
America runs on K-Cups
To be fair, Green Mountain has always had a tricky business model. Championed as the creator of single-serving Keurig coffeemakers, Green Mountain sells the appliances at very low margin. But until recently, that has worked well for the company because it makes the big bucks on sales of its high margin K-Cup refills -- which cost customers around $0.75 apiece.
Both Starbucks and Dunkin' Brands
These agreements were a positive for the K-Cups king in the short term, although in the bigger picture Starbucks and Dunkin' were the real winners as it gave them an entry point into the booming single-serve segment.
With patents soon expiring on its Keurig brewing system, why would rivals like Starbucks and Dunkin' continue to pay royalties to Green Mountain when they can just as easily make and sell their own cups for use in these machines? As harsh as the reality may be, we knew this day would come.
In any industry, one company's success will inevitably lead to increased competition in the space. For Green Mountain, it's unfortunate that the rivalry came sooner rather than later. Even grocers are getting in on the action.
The problem is that these guys can afford to sell their unlicensed refill cups at a fraction of the cost that Green Mountain does. Safeway already offers its Safeway Select cups for $0.58 each, which is $0.17 less than rival K-Cups. While there is no denying the challenges this raises for Green Mountain, I think there's still plenty of opportunity left for the company in the multibillion-dollar coffee industry.
Your caffeine fix
In a panic to sell shares of the coffee roaster, investors seem to be missing some key factors. Let's not forget that Green Mountain currently controls more than three-quarters of the single-serve coffee segment. That's a niche that isn't going away overnight.
Additionally, Green Mountain still has ongoing licensing deals with Starbucks, Dunkin' Brands, Caribou Coffee
Shares of Green Mountain are down more than 60% year to date. However, the stock certainly isn't overpriced compared to its coffee peers.
Wait it out
Current shareholders would be wise to sit tight until the company reports earnings next month. Investors will get a better read on the financial health of the company during its quarterly conference call, which is scheduled for Aug. 1. Given the numerous headwinds facing Green Mountain Coffee Roasters, this stock is not for the faint of heart.
That's why more conservative investors will appreciate this special free report from The Motley Fool's top analysts: "3 Dow Stocks Every Dividend Investor Needs." In it you'll discover three solid companies, with sustainable business models, that you should own today. However, the report won't be around forever, so click here now for instant access to your free copy.