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Green Mountain Roasting Nicely

By Will Ashworth

Tickers in this Article: MCD, PEET, SJM, KFT, SBUX, GMCR

Vermont-based Green Mountain Coffee Roasters (Nasdaq:GMCR) sits atop the list of coffee companies that still have kick. In a few short years, it has grown from nothing to closing in on $1 billion in revenue, during the time of Starbucks's (Nasdaq:SBUX) domination of the coffee world.

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The recession of the global economy has caused many consumers to cut back on disposable income expenditures. As a result, many coffee drinkers have reduced or eliminated their daily Starbucks habits. Yet, they still demand a good cup of coffee, although at a cheaper price.

A Robust Year
On November 12, Green Mountain reported tremendous fourth quarter and full-year sales. Q4 sales were up 45% from $93 million in 2007 to $134.8 million, with earnings per share increasing to 28 cents from 14 cents the year before. For the entire 12-month period, sales were up 46% from $341.7 million in 2007 to $500.3 million, with earnings per share increasing to 87 cents from 52 cents the year before.

In fiscal 2009, management expects revenues of $700 million, operating margins between 8.5% and 9.3% and earnings per share between $1.20 and $1.30. In addition to great operating numbers, Green Mountain's Keurig subsidiary settled its patent litigation with Kraft Foods (NYSE:KFT) and Tassimo Corporation on October 23 and received $17 million in settlements, which it promptly used to pay down debt. (Be sure to check out Analyzing Operating Margins.)

Single-Cup Brews Business
Single-cup brewing is most certainly the revenue and profit driver for Green Mountain Coffee Roasters moving forward. Sales of K-Cup portion packs are expected to increase by 50-60% in 2009. In 2008, the company sold 983,000 Keurig brewers and shipped one billion K-Cups - an increase of 105% and 59%, respectively. In September, it agreed to acquire the Tully's coffee brand and wholesale business for $40.3 million.

In relatively short order, Green Mountain could significantly increase distribution of Tully's, complimenting its own business on the east coast. Tully's sold $30.4 million at wholesale for the 12-month period ended June 30, 2008 and Green Mountain feels it has even greater selling capacity. Tully's coffee is unavailable in K-Cup's, which gives Green Mountain an excellent opportunity to grow the Keurig and K-Cup brands in grocery stores on the west coast. Green Mountain's acquisition of Tully's should be accretive after 12 months of ownership.

Awakening Potential
K-Cup coffee is taking grocery stores by storm. Although the 12-count K-Cup product is stocked in only 10% of grocery stores nationwide, it maintains a 33% share of the single-cup coffee market. With grocery customers trading up Folgers (which was recently acquired by Smucker's (NYSE:SJM)) and Kraft's Maxwell House in favor of premium specialty coffees, Green Mountain has lots of room for growth.

Single-Cup Sales Success Or Stagnation?
While most coffee company stocks are down considerably across the board, Peet's Coffee and Tea (Nasdaq:PEET), McDonald's (NYSE:MCD) and Green Mountain are exceptions to the rule, with Green Mountain coming in third in performance of the aforementioned companies. Stifel Nicolaus upped its rating on Green Mountain from "sell" to "hold" on November 11, but it still has serious reservations about the level of success Green Mountain can achieve with sales of Keurig single-cup brewers during the presently hostile economic environment. Furthermore, competitors have dropped prices on packaged coffees, which could dip into Green Mountain's sales. While shorts hold 47.6% of the float, management does not hold the same reservations. (Learn about ratings at Why There Are Few Sell Ratings on Wall Street.)

Bottom Line
Solid fourth quarter and full-year sales results, the perk of a recent acquisition and positive growth potential signal rich possibilities for Green Mountain.

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

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