Sit down, have a seat and let’s enjoy a nice cup of coffee together while we mull over what’s happened to Green Mountain Coffee Roasters (NASDAQ:GMCR) over the last year.
Actually, a lot has happened, so maybe you’d better make it two cups.
A little background while the coffee brews: GMCR was founded in Waitsfield, Vt., in 1981. The company went public in 1993 and in the same year made an investment in Keurig, a privately held company developing a system that brewed a single cup of coffee or tea in less than a minute using a portioned-product “K-Cup” designed specifically for its machines.
The system exploded in 1998 when GMCR was licensed to put its specially packed “K-Cups” into the Keurig machines. Then in 2006, GMCR paid $104 million to purchase Keurig. The Keurig system and GMCR’s expanding blends and brands — including Tully’s Coffee, Diedrich Coffee and Coffee People — was a match made in heaven as consumers bought up the single-cup systems.
Today, they’re found … well, just about everywhere. GMCR has vastly expanded the offerings for the Keurig system, and K-Cups are now available that serve up drinks from Dunkin’ Donuts (NASDAQ:DNKN), J.M. Smucker (NYSE:SJM, owner of Folgers and Millstone brands); Starbucks (NASDAQ:SBUX) and ConAgra (NYSE:CAG, owner of Swiss Miss), among others.
That brings us to a year ago.
Naturally, GMCR’s stock was a winner, showing enough growth to warrant a 3:1 split back in 2010, reaching an all-time closing high of just more than $111 per share on Sept. 19, 2011.
Suddenly the floor collapsed, taking a pile of investors down with it.
In 2010, the Securities and Exchange Commission opened an inquiry into revenue recognition and costs that forced the company to restate net income and earnings back through 2007. It didn’t stop people from buying then, but it likely was in the back of investors’ minds later on.
While GMCR did pull back significantly after hitting its Sept. 19 highs, the real damage began to be done after Oct. 17, 2011, when The Wall Street Journal reported that noted hedge fund manager and short-seller David Einhorn crushed the company in a PowerPoint presentation to the Value Investing Congress.
GMCR stock was creamed, and it’s been even more downhill ever since.
Piling onto Einhorn’s pessimism was the realization by investors that 1) the Keurig patent was going to expire in 2012, and 2) Starbucks was going to get more involved with GMCR’s turf. Starbucks did just that in early 2012, rolling out its Verisimo, a single-serve coffee and espresso machine. Nestle‘s (PINK:NSRGY) Nespresso machines also were a lingering worry.
GMCR followed up the bad news with worse news, telegraphing a slowdown in revenues and earnings to Wall Street in May by cutting back guidance on a lack of demand for their K-Cups and the Keurig machines. Worse, Chairman Robert P. Stiller — among others, but certainly most prominently — sold shares off in an effort to ward off margin calls on stock suddenly not worth enough as collateral.
Later, GMCR would take another hit when Kroger (NYSE:KR) announced it was putting its own branded, Keuric-compatible products on shelves (not so bad), but left the door open to store-branded cups compatible with other systems (bad).
A recent mild comeback restored some of the luster to the stock as of late, possibly driven by Italian coffee roaster Lavazza upping its minority stake in the company to 6.8% late last week. Still, when it was all said and done, GMCR fell some 70% from then to today.
That brings us mostly up to date.
Third-quarter revenues released in early August showed improved revenues thanks to higher prices charged for K-Cups, but gross margins were down due to “under-utilization of the Company’s manufacturing base as a result of lower than expected manufacturing through-put primarily due to lower K-Cup pack demand and lower-than-planned production levels,” according to GMCR’s earnings release.
In short, the K-Cup patent officially expired Sept. 16, and GMCR already is out in front of the damage, announcing cuts in its full-year 2012 forecasts on the top and bottom lines.
So what once was a high-flying momentum stock with a virtual monopoly is now a recovering company with an expired patent in a suddenly fierce, competitive environment. GMCR still is a short-seller favorite — with 31% of shares short as a percentage of float — so there isn’t a lot of confidence going around. Of course, bulls might say GMCR is a bargain, trading at a P/E of 13 that’s well below competitors SBUX (27) and DNKN (58).
GMCR isn’t just sitting around letting its systems expire with no thought to the future: last week the company announced a commercial expansion of its brewing system via its premium Keurig Vue, incorporating RFID (radio frequency identification). The system features customized technology capability, which means you can adjust size, temperature and strength in your cup 0f coffee.
Still, other than offering more variety in coffee flavors and brands, I’m not quite sure what else GMCR has up its sleeve.
At least for now, where Green Mountain stands is all a matter of one’s perspective …but I don’t see much to entice me to buy GMCR. However, even if you’re optimistic on the company, just keep the expectations realistic. Magical runs like Green Mountain’s rarely happen twice.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.