Green Mountain (GMCR) Roasted as Shares Get Slashed in Half
Shares of Green Mountain Coffee Roasters (GMCR: Charts, News), the maker of Keurig single-serve coffee brewers, lost nearly half their value yesterday after the company missed Street estimates for the second time in the past four quarters. Green Mountain, which is regarded as a pioneer of single-serve coffee brewers, saw demand for its K-Cup coffee cups drop sharply in the second quarter.
The stock, a favorite of momentum traders, traded at $108 per share last September, but now trades for a meager $26. Last October, hedge fund Greenlight Capital manager David Einhorn warned investors that Green Mountain had been "inflating sales" and practicing "questionable accounting". Since Einhorn's statement, shares have slid over 70%.
For its second quarter, Green Mountain earned 64 cents per share, in line with analyst estimates, but its revenue of $885 million missed the expected $972 million by a wide margin. As investors were still digesting the lukewarm numbers, Green Mountain cut its fiscal 2012 sales guidance from $4.3 billion to $4.5 billion down to a range between $3.8 billion and $4 billion. It also cut its full year earnings per share forecast to $2.40 to $2.50, down from $2.55 to $2.65 per share.
Green Mountain management failed to provide a full explanation for its weakening sales. In a conference call with analysts, the company suggested that weak demand for warm holiday drinks - such as cider, hot cocoa and coffee - was to blame. CEO Larry Blanford offered a generic statement, stating, "We're very positive about this business going forward, but there's a lot of moving parts."
To analysts who have been following Green Mountain, however, the company's weak sales forecast was easily explained by other unaddressed factors.
Although Green Mountain was able to dominate the market in 2011, its competitive barriers are fairly low for other established coffee makers. In addition to Starbucks' competing brewer, Nestle SA's Nespresso machines - popular in both Europe and Asia - are also gaining ground. Despite Starbucks' public declaration of war against Green Mountain, the latter is still bound to sell Starbucks-branded K-Cups for use in its Keurig machines, such as Green Mountain's newest brewer, the Vue. Starbucks has stated that it has no intentions of returning the favor with its Verismo brewers.
Green Mountain's K-Cup patents are also set to expire in September, which will allow other companies to produce generic K-Cups for its Keurig brewers. Since the company sells the Keurig brewers at thin margins or a loss in order to make up its sales with higher margin K-Cup sales, analysts expect the company's margins to crumble next year. Stifel Nicolaus analyst Mark Astrachan remarked, "We anticipate competition will pressure K-Cup pricing, increased promotional activity, and result in share loss for Green Mountain, negatively impacting the company's long-term earnings power." Several retailers do not disclose Keurig brewer and K-Cup sales publicly, for competitive reasons, which makes it harder for analysts to gauge future sales.
On the bright side, the company is currently working on a new espresso machine with popular Italian coffee company Luigi Lavazza SpA, which owns a 5% stake in Green Mountain. Lavazza, a popular brand in Europe, could help Green Mountain gain some much needed footing overseas. Shares now trade with a P/E of 13 - a humbling valuation for a company once listed in the same breath with high-fliers such as Amazon (AMZN: Charts, News) and Chipotle (CMG: Charts, News).
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