Is Green Mountain Too Expensive?

With shares of Green Mountain Coffee Roasters (NASDAQ:GMCR) trading at around $54.96, is GMCR an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Green Mountain engages in the specialty coffee and coffeemaker business in the United States and Canada. There was much fear about the company’s growth prospects when K-cup patents expired last year, but it hasn’t hurt the business or the stock price. Actually, it should now be looked at as a positive that such a large potential headwind hasn’t slowed the company down. Consumers still remain very interested in brand products.

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Let’s take a look at a few positives for Green Mountain:

  • Two consecutive strong quarters
  • Two-year $500 million buyback program that’s set to end in August, 2014
  • Cutting 2 percent of workforce (not a positive for employees)
  • Constantly looking to increase brand investments
  • Highly innovative company
  • Has made strategic partnerships with the likes of Dunkin’ Brands Group (NASDAQ:DNKN), Starbucks Corporation (NASDAQ:SBUX), and Costco Wholesale Corporation (NASDAQ:COST) through the years
  • New and more affordable Keurig Vue 500 with many impressive features

So far, this looks like a good situation. However, there are a few negatives to consider as well. One of the biggest negatives is weak guidance. On other hand, it’s possible that Green Mountain is sandbagging, especially considering it has been done before. Another negative is valuation. Green Mountain is currently trading at 24 times earnings. Therefore, future results better be strong. Otherwise, the stock will take a substantial hit. There is a 37 percent short position on the stock. Considering fundamentals are at least decent, it seems as though many people don’t believe in the business model. Other shorts simply might think the stock is overvalued here. One final potential negative is Starbucks coming out with the Verismo coffeemaker. This isn’t likely to hurt Green Mountain much, but it’s a sign that Starbucks might try again with a different product down the road.

The chart below compares fundamentals for Green Mountain, Starbucks, and the much smaller Farmer Brothers Co. (NASDAQ:FARM). Green Mountain has a market cap of $82.8 billion, Starbucks has a market cap of $42.35 billion, and Farmer Brothers has a market cap of $210.68 million.

GMCR

SBUX

FARM

Trailing   P/E

24.03

30.40

N/A

Profit   Margin

9.05%

10.50%

-4.43%

ROE

16.95%

28.84%

-23.96%

Dividend   Yield

N/A

1.50%

N/A

Operating   Cash Flow

$682.83 Million

$2.35 Billion

$18.54 Million

Short   Position

37.00%

1.50%

4.80%

Beta

0.32

0.78

1.62

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…