Green Mountain Preview: Growth Rates To Slow And New Brewers To Contribute More

Green Mountain Coffee Roasters (NYSE:GMCR) is scheduled to announce its Q4 earnings on November 27. This has been an eventful year for Green Mountain as the company has seen its share of ups and downs. The stock had declined more than 70% from its high of $69 after its second quarter earnings failed to meet the market expectations.

However, the stock has climbed close to 30% since the last quarter’s earnings were released as a slew of deals and partnerships has given investors a ray of hope. In the fourth quarter itself, Green Mountain has struck agreements with Snapple and Costco. Even Kraft announced its decision to introduce its own K-Cups that can be used with Keurig brewers.

See our full analysis of GMCR here

Growth Rates To Slow Down

Two of the company’s patents expired in September which paved the way for other competitors and private labels to introduce their own K-Cups without having any sort of an obligation to pay royalty to Green Mountain. There is still uncertainty as to how much the impact of the patent expiration will be in the long term. However, what is pretty clear is that going forward Green Mountain will not be able to replicate the growth rates experienced in the previous years, but we believe that this has already been factored in to the company’s stock price. GMCR’s revenues doubled in 2011, but we expect it to rise by less than 30% in 2012.

With the increased competition, it won’t be surprising to see some of Green Mountain’s K-cup sales eaten up by private labels. Moreover, the margins are likely to be squeezed because of the intense price competition.

Still Plenty of Potential

Green Mountain, in turn, has recognized the need to to generate higher profits through the sale of its brewers and has therefore launched two new brewers this year at much higher prices by positioning them as a more premium product. Earlier, it used to sell the brewers near cost price in order to encourage consumers to buy the product and profits were generated mostly through the recurring sales of K-cups. Thus, even if the K-Cups sold per brewer declines, a healthy growth of brewers will ensure that the total K-Cups sold by GMCR continues to rise.

One thing working in Green Mountain’s favor is the high degree of compatibility that its Keurig single cup brewers possess. It gives the customers the option of brewing the drinks of their favorite brand on a single platform, something which acts as a strong reason to choose Keurig brewers over Starbucks’ Verismo or any other single cup brewer. The fact that demand for Keurig single cup brewers is likely to remain strong is evidenced by the fact that Kraft, which in spite of having its own brewer called Tassimo, has still decided to roll out K-Cups compatible with Keurig’s brewers. Thus, going forward, we expect brewers to contribute more to the top-line as well as the bottom-line.

We have a $29 price estimate for Green Mountain Coffee Roasters, which is slightly above the current market price.

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