Starbucks (NASDAQ:SBUX) has long been a fan favorite here in Fooldom. Its stock has risen more than 300% in the past five years. But more than just one enterprise is turning coffee beans into cash. GreenMountainCoffee's (NASDAQ:GMCR) stock, since bottoming out in 2000, has climbed a whopping 500%.
But while Green Mountain continues to increase sales, its earnings were crushed. For the first quarter of fiscal 2005, the company's revenues jumped 16% to $50.4 million. However, its net income dropped 7.4% to $2.4 million.
A part of its earnings hit can be attributed to operating margins that declined 19% to a level of 9.6% -- compared with 11.9% a year ago. Naturally, contracting margins exacerbate investors' concerns over the company's owner earnings (or structural free cash flow).
High levels of capital expenditures in fiscal 2004 caused owner earnings to suffer. For 2005, the company is projecting capital expenditures to total $9 million to $10 million, almost half as much as the amount in 2004. This significant reduction is likely to have a pronounced effect on its cash flow statement. And positive structural free cash flow should do wonders for a balance sheet containing $6.5 million in cash and $11.8 million in long-term debt.
Another plus for potential investors is that Green Mountain is projecting earnings per share of $1.12 to $1.19, despite the Q1 net income loss. But with its stock priced at around $24, the firm is stamped with a steep valuation at 21 times anticipated earnings. Fiscal 2005 sales growth estimates of 15% to 20% leave little room for error at the current price.
A steep valuation, contracting profit margins, and inconsistency in structural free cash flow are all valid concerns, and they're all reason enough to wait and see what happens next. Roast your coffee, but don't toast your portfolio -- be a patient investor and wait for Green Mountain's stock to offer an attractive bargain.
Fool contributor Jeremy MacNealy does not own shares in any company mentioned.
