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Green Mountain Hits a Fresh Peak

By Rick Munarriz - Apr 5, 2013 at 7:00PM

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Shares of the Keurig company hit a new 52-week high this week. Positive developments continue to materialize.

Green Mountain Coffee Roasters (GMCR.DL) continues to defy the skeptics that figured the java giant would be toast after its pertinent K-Cup patents expired seven months ago.

Shares of the company behind the Keurig single-serve coffee platform raced to a 52-week high earlier this week, after the analysts at KeyBanc boosted their price target on the shares from $55 to $70. The sunnier outlook for Green Mountain stems from channel checks showing that private label share of the market is not exceeding 10%.

In other words, fears that Green Mountain would suffer at the hands of third-party producers of refills for Keurig brewers, who would flood the market and trigger a price war since patent expiration, have been overblown.

This was never going to play out that way. This isn't a major drug going off patent with dirt-cheap generics storming the market.

There is still value to having Green Mountain as a partner. Starbucks (SBUX 2.03%) remains an active Green Mountain partner, and you don't get any more premium than the baron of baristas. There are benefits to having Green Mountain as a distributor. Whether it's the shelf space or the Keurig designation, it isn't easy to crank out K-Cups just because it's legal to do so now, without Green Mountain's blessing.

Like most stocks hitting new highs earlier this week, Green Mountain couldn't hold on to its gains as the market weakened after Monday's peak.

The good news still kept coming.

Keurig was tapped as "Brand of the Year" in the coffee maker category for the second year in a row in the annual Harris Poll EquiTrend Equity Study. The study surveys thousands of consumers to derive brand health assessment.

Yesterday, it was Dougherty & Co. with a positive note on the company, and that's surprising given that Dougherty & Co. was bullish on the shares until downgrading the stock two months ago.

The upbeat note points to encouraging research from consumer packaged goods tracker SymphonyIRI, showing that, year over year, K-Cup unit sales soared 49.9% in March, snapping a string of decelerating growth in the three previous months.

Despite having its shares more than triple since bottoming out this past summer, Green Mountain isn't as expensive as its stock chart may suggest. The stock is fetching 19 times this year's projected earnings, and just 17 times next year's target. This stacks up nicely against the slower growing Starbucks at 27 times this year's earnings, and a multiple of 22 looking out to fiscal 2014.

Starbucks is naturally the superior brand in coffee, worthy of a premium. However, analysts' profit forecasts have been inching higher for Green Mountain in the recent weeks and months -- and that may continue to move higher once the pros digest the strong March K-Cup sales data. The same can't be said for Starbucks.

Editor's note: A previous version of this article indicated that Green Mountain's shares reached an all-time high during the week ending April 5. Green Mountain's actual all-time high occurred in August 2011. The Fool regrets the error.

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