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Green Mountain Coffee Roasters (GMCR): Brewing Hot!
By: Market IQ
By Adil Yousuf
Caught in a tug-of-war between bulls and bears (with over 35% short float), Green Mountain Coffee Roasters (NASDAQ:GMCR) has always gotten more than its fair share of attention. Most recently the firm has gotten investors excited after reporting stellar Q2 earnings and renewing their partnership with Starbucks (NASDAQ:SBUX).
For Q2, GMCR reported earnings of 93 cents per share which came in well above 73 cents per share consensus. Though, revenue of $1 billion was slightly shy of expectations. Gross margin improved by approximately six points, along with operating income that increased by 41%. Guidance for the current quarter of 71-78 cents EPS was also better than the Street's consensus view, but the firm did lower its full-year revenue forecast.
Starbucks and GMCR recently agreed to renew 1 and expand their strategic partnership for manufacturing, marketing, sale, and distribution relating to Starbucks- and Tazo-branded single-serve packs (K-Cups) worldwide.
Under the new deal announced on May 8, 2013, Starbucks and GMCR will stretch their collaboration to include more brands and varieties to the single-serve cups it currently offers for the Keurig brewer, in an agreement set to last a minimum of five years. The new deal will approximately triple the number of Starbucks-branded items available for GMCR's Keurig system — including Seattle's Best and Torrefazione Italia coffees, Teavana teas, and Starbucks cocoa.
The deal certainly helps GMCR to have licensed, branded partners like Starbucks in hand to offset single-serve competition from private-label players like Treehouse Foods (NYSE:THS) and other entrants like Mondelez (NASDAQ:MDLZ). Moreover, it doesn't seem unreasonable to read this deal as a sign that Starbucks' Verismo hasn't taken the coffee world by storm.
Market IQ pro metrics give GMCR an Outperform rating (see below). GMCR's Quality is better than 91% of its peers — Strong profitability, good cash flow from operations and a pattern of positive EPS growth over the last two years warrants a high Quality number (see below).
The above Quality - Value chart consists of the following companies: Green Mountain Coffee Roasters (NASDAQ:GMCR), StarBucks (NASDAQ:SBUX), Tyson Foods (NYSE:TSN), McCormick & Co. (NYSE:MKC), Hillshire Brands (NYSE:HSH), J.M.Smucker Co. (NYSE:SJM), and Dunkin' Brands (NASDAQ:DNKN).
GMCR has a largely solid financial position and reasonable debt levels that outnumber 80% of its peers — Along with a favourable debt/equity ratio; the company maintains an adequate interest coverage ratio, which illustrates the ability to avoid short-term cash problems 2.
GMCR shares have staged an impressive run in recent months rising more than 70% in 2013, outperforming the rise in the S&P 500 Index during the same period. The stock's sharp appreciation has driven it to a Valuation level which is now expensive relative to its peers (see below).
Going forward, the company is optimistic about its future operations. The company says its U.S. household penetration of 13% leaves plenty of upside for its Keurig brewers in the home and office, and expects its razor-and-blade model to continue delivering as adopters of the system buy brew packs.
GMCR's earnings growth speaks to its continued strategic progress. However, despite bullish momentum flowing in GMCR's favour, investors want to know about the financial terms of the firm's agreement with Starbucks. How much is GMCR ceding to Starbucks to keep them invested in this relationship? As GMCR is essentially a razor/razor blade business model (making the money off the single-serve cups, not the brewers), that's no trivial concern. In a worst case scenario, one would fear that Starbucks is essentially just incorporating GMCR as another arm of its global distribution strategy.
1Starbucks and GMCR first partnered in March 2011. Starbucks has shipped more than 850 million Starbucks coffee K-Cup packs since then.
2GMCR has an Equity/Debt ratio of 2.42 and an Interest Coverage ratio of 22.
This commentary is for informational purposes only and does not constitute investment advice. The opinions offered herein are not recommendations to buy, sell or hold securities. Market IQ expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.