Don’t Expect GMCR Stock to See $60 Anytime Soon

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Keurig Green Mountain (GMCR) stock surged 20% in after-hours trading following the company’s better-than-expected fiscal fourth quarter earnings report. This has many on social media platforms predicting a return to greatness for GMCR, or at least bigger gains following a 75% loss for Keurig stock over the last 12-months. While this assumption is understandable given GMCR stock’s reaction to earnings, investors really should take a step back and look at the numbers.

Keurig Machine from Green Mountain Coffee Roasters

Short Covering Drives GMCR Stock, Not Strong Earnings

The bottom line is that GMCR is the beneficiary of oversold Keurig stock and, likely, short covering.

GMCR’s short interest, as well as the percent of shares outstanding that are short, have surged over the last year, up more than 150%, respectively. This has played a big role in why GMCR stock has fallen so rapidly over the last year.

However, as many investors are aware, a good indication that a stock’s free-fall is nearing an end is when short interest starts to decline. From October 16 through October 30, GMCR’s short interest declined by nearly 500,000 shares. While that’s insignificant compared to the 15.5 million shares that remain short, it is a sign to the market that shorts have started to exit the position, thereby helping the stock surge higher after earnings as shorts cover.

In other words, GMCR stock’s rally post-earnings is very much technical, if not entirely, because after all, Keurig Green Mountain’s earnings were simply horrible!

How Bad Were GMCR Earnings?

First and foremost, GMCR might have beaten revenue expectations with $1.04 billion, but that represents a 13% year-over-year decline. Last time I checked, double-digit annual losses are never a good thing.

The biggest loss came from brewers and accessories. When consumers are buying brewers, chances are they are also buying K cups, making brewers an important segment for GMCR. Furthermore, GMCR has invested a lot of money into new brewing systems, but with sales falling 32% from last year to just $124 million, these new initiatives don’t seem to be paying off.

With that said, its portion pack business didn’t perform well, either, falling 9% to revenue of $861 million. Despite these losses and GMCR’s goal to cut costs, the company’s gross margin still fell by a whopping 530 basis points versus the same period last year. For me, that’s the icing on the cake.

Keurig Stock Unlikely to Reach $60

All things considered, GMCR stock is now 20% off its 52-week lows, despite the company’s earnings performance being bad at every turn. Therefore, investors should not expect GMCR stock to support a valuation multiple much higher than its current forward P/E ratio of 14.

Hence, Keurig stock may top $50, but the chances of it trading higher by another 20% to reach $60 are slim to none. That would represent a forward P/E ratio over 17 for a company that just saw double-digit revenue declines and significant margin losses. Thus, there’s just no way to figure that a company with this kind of dismal operating performance could support such a multiple. Furthermore, short interest is sure to rise with the stock price jumping 20%.

Albeit, investors must realize that the only reason short interest saw moderate declines over the last month is because of how significant GMCR stock losses have been over the last year, especially in the month prior to earnings.

In retrospect, short-sellers are going to look at the earnings performance and Keurig stock multiples to determine what comes next, and when doing so, most will likely confirm that GMCR stock has a better chance at re-testing 52-week lows than making it back over $60.

As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/11/dont-expect-gmcr-stock-see-60-anytime-soon/.

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