On January 23, 2013, we upgraded the leading coffee maker,
Green Mountain Coffee Roasters Inc.
) to Outperform backed by the company's efficient measures and
strategic agreements to drive out competition following the
expiry of the K-cup patents. The company has also rolled out new
products to turnaround its business.
Why the Upgrade?
Green Mountain is expected to make a strong start with its
first quarter 2013 results, scheduled to report on Feb 6,
considering its upbeat fourth quarter 2012 results, initiatives
to rule out competition, new product roll outs, and better
visibility for fiscal 2013.
Green Mountain has a Zacks Rank #1 (Strong Buy) and an
Earnings ESP (Read:
Zacks Earnings ESP: A Better Method
) of +3.1%. This is very meaningful and a leading indicator of a
likely positive earnings surprise in the coming quarter.
In addition, the company is optimistic about fiscal 2013, as
the company raised its earnings outlook for the fiscal 2013 to a
range of $2.64 to $2.74, up from the prior expectation of $2.55
to $2.65. The sales estimates for fiscal 2013 were raised by
88.6% from the previous guidance to $4.5 billion.
Following the release of fourth quarter results, the Zacks
Consensus Estimate for 2013 grew 7.2% to $2.68 per share over the
last 90 days.
What is the cause for the strong positive bias on the
The fourth quarter earnings upswing prompted us to be
optimistic on the stock. The company reported strong fourth
quarter 2012 earnings of 64 cents, which surpassed the Zacks
Consensus Estimate of 36.0%. Revenues increased 33.0% from the
year-ago period to $946.7 million, reflecting the success of
Keurig Single Cup Brewers, single serve packs (K-cups), and
The company is focusing on its products and putting in efforts
to turnaround its business. Apart from rolling out new products,
Green Mountain Coffee Roasters is upgrading its Keurig brewing
system, by introducing a new Keurig Vue V1200 Brewer, designed
with RFID (radio frequency identification) technology allowing
users to have control over the strength, size and temperature of
The company has also launched affordable Keurig brewer models
in order to reach out to more consumers. Green Mountain is very
active toward adding value to its brands and we believe that this
value addition will spur revenue growth momentum in future.
Further, Green Mountain has managed to appeal consumers even
after its patents for the K-cups expired in September 2013. Green
Mountain's owned and partnered brands are priced at the same
level as that of its aggressive competitor
) unlicensed Maxwell House and Gevalia single-serve coffee pods
compatible with Keurig brewing systems, thus ruling out
competition. But Green Mountain still holds an upper hand as it
offers more coffee bag count per box, compared with Kraft's
Moreover, we expect Green Mountain's market share to remain
intact as the private label K-cups from companies like Treehouse
Foods and Maxwell House and Gevalia brands of Kraft Foods which
are sold at retail outlets like
Wal-Mart Stores Inc
) do not seem to have a positive customer feedback.
Green Mountain is also focusing on competing with private
label as it has entered into an agreement with
Costco Wholesale Corp.
) under which it will make private-label Costco Kirkl and
Signature brand K-Cup packs for the Keurig single-cup brewing
Other Stocks to Consider
You can also consider investments that offer exposure to the
attractive food industry. Some such stocks are
Farmer Brothers Co.
Vitamin Shoppe Inc.
) that carry a Zacks Rank #2 (Buy).
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