by Jeff Reeves | March 9, 2012 9:35 am
Starbucks (NASDAQ:SBUX) is the king of coffee, but for a while, Green Mountain Coffee Roasters (NASDAQ:GMCR) was giving it a run for its money. Green Mountain — with its patented Keurig single-serve coffee maker and K-Cup technology — allowed easy, high-end coffee brewing at home for a relative bargain vs. your local barista.
But Starbucks hasn’t taken kindly to the competition. The Seattle company has caught on to the tremendous potential of single-serve brewers and is launching its own machine, the Verismo. That could mean the end of the line for Green Mountain and its very profitable run.
The momentum of GMCR stock should be well-known by all investors. Green Mountain is up more than 600% since early 2009 vs. 42% for the Dow Jones Industrial Average, due almost wholly to the roaring success of its Keurig and K-Cups.
Consider that revenue was $500 million in 2008 and topped $2.6 billion in 2011. More impressive is that earnings per share went from a measly 19 cents for fiscal 2008 to $1.31 last year — a nearly sixfold increase!
But momentum stocks like GMCR always follow the same script: massive expansion, soaring stock prices — then a very painful correction when the growth stops.
That correction is what we are witnessing right now in Green Mountain, with the stock slumping 15% in early trading.
The irony is that Starbucks itself suffered this momentum stock letdown a few years ago. It had massive growth fueled by rapid expansion and java junkies eagerly spending more cash on caffeine. Then SBUX overextended by opening too many stores, and growth slowed. Competition cropped up and consumer tastes changed to favor energy drinks like those produced by Monster Beverage (NASDAQ:MNST) and Red Bull. And unfortunately, these trends aligned with the financial crisis and resulting recession, gutting consumer confidence and severely hurting traffic to Starbucks cafes.
SBUX went from $40 per share in 2006 to bottom out at almost $10 less than three years later.
It’s not necessarily Green Mountain’s fault that the music stopped. It had a great idea and made a great run — at least, while it lasted. Only the rarest of companies can see breakneck earnings and sales growth like that maintained for a long period of time, and more often than not, momentum naturally wanes due to circumstances beyond the control of the CEO or company itself.
But now that investors are skeptical, prompting a major contraction in GMCR stock prices, it’s on Green Mountain to prove that it has a legitimate second act past a high-end replica.
Again, consider Starbucks. Starbucks managed to restore confidence by calling former CEO Howard Schultz out of retirement, streamlining operations, launching its Via instant coffee line and revamping its menu. Eventually some of those investors came back because they thought SBUX had evolved.
But it took five years and all that work for Starbucks to eclipse its previous 2006 peak.
Green Mountain should take notice. It has to admit that its Keurig business is mature and competition is going to wear away at the bottom line — then figure out its next move fast.
Otherwise, it’s going to be a long few years of steady declines as other companies like Starbucks eat GMCR’s lunch.
Jeff Reeves is the editor of InvestorPlace.com. Write him at firstname.lastname@example.org, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.
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