Another day, another coffee stock kicking derriere. Two days ago it was Dunkin' Brands
So what was so great about Green Mountain's earnings?
Triple-digit growth all around
Green Mountain's net income grew a staggering 206% from last year's third quarter, on the back of a sales increase of 127%. Earnings per share went from $0.13 per diluted share to $0.37. Positive chatter by Wall Street analysts and a forecast of 100% year-over-year sales growth for next quarter added to the fun
Any time a company almost triples its EPS, the stock is bound to see some action. Green Mountain didn't disappoint; its share price rose 16% on Thursday.
Notice that while earnings tripled, the stock price went up 17%, not 200%. That's because Green Mountain's share price already reflected most of that fantastic growth. Believe me, if Starbucks
In contrast, so much of Green Mountain's $100 price tag and 129 P/E is already built on expectations of aggressive future growth that there's little left to surprise investors. And if Green Mountain doesn't continue to meet or beat those expectations, the stock will be severely punished.
Compounding my worry, I note that Green Mountain has never had a year of positive free cash flow since 2007. And I look more heavily to free cash flow than I do to reported earnings (or dividends).
Therefore I recommend that aggressive growth investors look to SodaStream
SodaStream has a lower P/E and P/S, and a large growth opportunity in our soda-guzzling country. Dunkin' Brands has the steadiness and operating leverage of an established franchise, with a much lower P/E than Green Mountain. And Starbucks still continues to crush the market with surprising growth.
Green Mountain may continue to outperform, but I think you can find a better trade-off between risk and reward elsewhere.
The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have variously recommended buying shares of Starbucks, SodaStream, and Green Mountain; creating a lurking gator position in Green Mountain; and shorting Green Mountain. Try any of our Foolish newsletter services free for 30 days.
Fool contributor Chris Baines loves coffee but loves value investing even more. Follow him on Twitter @askchrisbaines. Chris's stock picks and pans have outperformed 89% of players on CAPS. Chris owns no shares of the companies mentioned. 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.