Green Mountain Coffee Roasters (NASDAQ:GMCR) has been one of the bigger growth stories during the past 10 years. Since 2003, Green Mountain's revenue per share figure has expanded 1,877%, a compound annual growth rate of 39.3%. Earnings per share have expanded at a CAGR of 49.8% over the same period. In addition, there are a number of factors that suggest this trend could continue.
Green Mountain's growth during the past two years has been boosted by the falling wholesale price of coffee. Indeed, Arabica coffee futures slipped to their lowest price in more than four years last week, as investors focused on massive global supplies. Arabica for December delivery dropped as low as approximately $1.15 per pound at the end of last week, down from the highs of $3 per pound seen back in 2011.
Falling wholesale coffee prices have widened Green Mountain's profit margin as the company has not passed savings on to consumers. Overall, the company's operating margin has expanded from 14% for fiscal 2011 to slightly less than 20% for the last reported quarter. Additionally, analysts have consistently raised Green Mountain's earnings estimates in line with collapsing coffee prices.
Competitors are also getting a boost
Of course, falling coffee prices are also working to the advantage of Green Mountain's competitor Starbucks (NASDAQ:SBUX), although not to the same scale. While Green Mountain's operating profit margin has expanded nearly 6 percentage points during the period since coffee prices started to decline, Starbucks' operating margin has only expanded from 14.7% to 16.4%.
Starbucks, however, is a more labor-intensive business, and while the company has a gross margin of 57% (last reported quarter), thanks in part to its high-priced, low-cost products, high selling and admin costs rapidly consume most of the leftover profit. Green Mountain's gross margin was 42% for the last reported quarter, but as noted, its operating margin is much stronger than that of Starbucks.
Plenty of customers to go 'round
Despite falling prices, coffee consumption throughout the U.S. is not expected to decline anytime soon. Indeed, according to recent studies, coffee consumption within the country is growing rapidly. According to the National Coffee Association's 2013 survey, 83% of the adult population within the U.S. drinks coffee, up from 78% last year.
In addition, consumption of single-cup-format coffee, Green Mountain's area of expertise, accounted for 13% of coffee consumption, up from 4% two years earlier. So all in all, consumption trends appear to support the thesis that Green Mountain will continue to grow rapidly and the combination of falling coffee prices will only increase profitability.
Competition is growing
Green Mountain's dominance over the single-cup market gives the company a relatively defensive position as competition within the coffee market heats up. Dunkin' Brands (NASDAQ:DNKN) has recently called out Starbucks, redesigning its stores to compete with the well-known coffee establishment. Dunkin's strategy has previously been to target the "morning" consumer, with around 60% of the doughnut chain's business done before 11 a.m,. compared with Starbucks, which generates about 50% of its sales after 11 a.m.
Dunkin' Brands has remodeled its stores toward a more relaxed environment and plans to double the number of its stores within the U.S. to 15,000 in an aggressive attack on its competitor's market share. Indeed, Starbucks only has 11,000 locations within the U.S., so Dunkin' Brands' aggressive strategy could bear fruit.
Still, Starbucks is also being proactive; the company is spending $1.2 billion for fiscal 2013, about two-thirds of which will go toward an attempt to renovate its own stores and expand into new locations.
Green Mountain is not without competitors; however, the company's existing market penetration of its Keurig coffeemakers and K-Cup single-serving coffee pods has led many analysts to conclude that private-label single-portion packs are not likely to make inroads into Green Mountain's market share. In particular, one analyst suggests that Green Mountain is only likely to lose a 10% to 15% market share to private labels due to the wide offering of 36 different brands of K-Cups.
Cash is king
One of Green Mountain's most appealing factors is the company's cash generation, which has helped it move from a net debt position of $576 million at the end of fiscal 2011 to a net cash position of $35 million at the end of the last quarter. In the 39-week period to the end of the company's fiscal third quarter, Green Mountain had generated $293 million in cash -- with that kind of cash generation and a clean balance sheet, this would not rule out further large stock repurchase operations.
All in all, Green Mountain's position in the rapidly growing single-cup coffee market, falling costs, and impressive cash generation make the company look highly appealing. On the other hand, Starbucks and Dunkin' are locked in an aggressive war for new customers, and this could hold back growth.
Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters and Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.