Green Mountain Shares — 3 Pros, 3 Cons

by Tom Taulli | August 2, 2011 12:42 pm

Even though Green Mountain Coffee Roasters (NASDAQ:GMCR[1]) is 30 years old, the company is growing like a startup. Last quarter, it saw its revenues soar 127%, with profits up a sizzling 206%. And keep in mind that there has been double-digit growth in net sales for the past 27 consecutive quarters.

As should be no surprise, the shareholder returns have been stellar, with the average annual gain at 103.93% over the past five years. Yes, coffee can be a wonderful business.

But can the good times continue? Or should investors be cautious?

Well, let’s take a look at the pros and cons:


K-Cup power. Back in 2006, Green Mountain purchased Keurig. No doubt, it was a game-changer. Keurig sells the highly popular single-cup brewing systems.

To boost growth, Green Mountain has signed major distribution deals with companies like Dunkin’ Brands (NASDAQ:DNKN[2]) and ConAgra (NYSE:CAG[3]). However, the big one was with Starbucks (NASDAQ:SBUX[4]), which plans to sell Keurig machines in stores in late 2012.

Dealmaking. Keurig was not Green Mountain’s only smart acquisition. In fact, the company has been quite active over the years. Some of GMCR’s other transactions include Tully’s Coffee, Diedrich Coffee, Timothy’s and Van Houtte.

And in light of Green Mountain’s strong market value and cash flows, it is a good bet that the company will continue to be aggressive with acquisitions.

Growth culture. Green Mountain’s management knows how to ramp things up. Despite the recession, the team has made big investments to become a top player in the specialty coffee industry. This includes an all-in strategy in terms of product development, partnerships, manufacturing systems and strong marketing.


Accounting. In September 2010, the Securities and Exchange Commission launched an inquiry regarding the accounting of Green Mountain, such as with revenue recognition and inventory. It is far from clear what will be the outcome.

What’s more, Green Mountain had to take a restatement to some of its financial results for 2007 to 2010.

Valuation. Green Mountain shares are selling at a hefty price-to-earnings ratio of 104. If anything, it seems that much of the growth already has been discounted into the valuation. Thus, if there is even a minor disappointment with quarterly results, there could be big drop in the stock price.

Dependence. According to the latest quarterly report, about 82% of Green Mountain’s revenues came from the Keurig. True, this is down from 88% a year ago. But the fact is the company essentially is a one-product company.


As seen with the recent successful IPOs of Dunkin’ Brands and Teavana (NYSE:TEA[5]), investors are looking for ways to find growth. Green Mountain certainly is benefiting from this.

However, lots of the stock buying has come from fast-money hedge funds. So things easily can go cold as they move to the next hot category. All in all, the cons outweigh the pros on Green Mountain.

Tom Taulli’s latest book is “All About Short Selling,”[6] and he has an upcoming book called “All About Commodities.”[7] You can find him at Twitter account @ttaulli[8]. He does not own a position in any of the stocks named here.

  1. GMCR:
  2. DNKN:
  3. CAG:
  4. SBUX:
  5. TEA:
  6. “All About Short Selling,”:
  7. “All About Commodities.”:
  8. @ttaulli:!/ttaulli

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