Is Green Mountain Cheap Enough to Buy?

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With shares of Green Mountain Coffee Roaster (NASDAQ:GMCR) trading around $24.55, is GMCR a Buy, a Wait and See, or a Stay Away? Let’s analyze the stock with the relevant section of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Shares of Green Mountain closed up 4.69 percent on November 16 after landing an upgrade from “Neutral” to “Buy” and a price target of $35 from DoughertyKeurig

The stock has come down over 47 percent this year to date, hitting a particularly brutal sell off early in May. Many investors are dubious about the company’s future now that the patents on its Keurig K-Cup coffee pod technology has expired, and competitors like Starbucks (NASDAQ:SBUX) are making their way into the market. The announcement of the Verismo machine, a high-end single cup brewer made by Starbucks, has been particularly concerning.

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But Green Mountain has proved resilient in the face of competition before, and some investors are regaining faith in the company. The stock price has come up 10 percent over the last month, buoyed by hedge-fund rock star Patrick McCormack picking up 500,000 additional shares for Tiger Consumer Management.

T = Technicals on the Stock Chart are Weak

As of November 15, the stock price is 1.05 percent above its 20-day simple moving average, or SMA; 2.75 percent below its 50-day SMA; and 27.73 percent below its 200-day SMA.

Since the beginning of the year, the stock has been in a downward trend, losing 47.38 percent of its share value this year to date, and 53.14 percent year over year.

The stock is trading in a 52-week range between $17.11 and $71.15.

T = Trends Support the Industry in which the Company Operates

The amount of coffee consumed globally is expected to go nowhere but up. According to Statistic Brain 54 percent of Americans drink over 18 drink an average of 3.1 cups of coffee every day. Americans collectively spend $18 billion a year on specialty coffee. Global coffee bean sales are estimated to be at $80 billion per year with 7.4 billion cups of coffee consumed, and growing at 30 percent annually.

An estimated 85 percent of coffee drinkers make their coffee at home instead of going out for a cup. While single serve coffee only represents about 5 percent of the coffee market, this figure could be seen as an opportunity to grow into a massive, rapidly growing, and high-margin market.

Green Mountain was the only game in town for a number of years, but with the expiration of the patents has and will see increased competition. Increased competition will likely cut into the company’s profit margins, currently sitting at 9.58 percent. However, this margin is still attractive enough that high growth will prove substantially profitable. With historical sales growth of 63.7 percent and about 50 percent of the single-serve market in 2011, Green Mountain is positioned to deliver.

Conclusion

That being said, it’s easy to recognize that its growth is not sustainable. Starbucks is a scary opponent to have in any market, and without patents to protect it Green Mountain could readily be out played. To book, David Einhorn famously shorted the stock, which seems to have put a black mark on it ever since.

Green Mountain looks like a Wait and See because of the risk associated with its position in the market. Investors willing to take on that risk may find it attractively priced with a p/e of 11.3 and a forward p/e of 9.77.

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