Green Mountain’s Stock Gets Dumped But Now Looks Oversold

Green Mountain Coffee Roaster (NASDAQ:GMCR) recently announced its Q2 2012 results with its net sales witnessing an increase of approximately 37% over the same period last year. However, news of dismal brewer sales and and the restatement of sales estimates for 2012 hasn’t gone that well with investors. Consequently, its share price plunged more than 40% since the earnings release on 2nd May. At present, GMCR is a dominant player controlling more than three-quarters of the U.S. single-serve coffee market and around 8% globally. In coffee makers, it competes with Robert Bosch, Nestle, Mars, Bunn-O-Matic and Philips Electronics, among others.

See our full analysis of Green Mountain Coffee Roasters here

Key Factors Affecting GMCR

Gross Margin Pressure

• Rising input costs (green coffee prices) forced GMCR to increase prices on its K-Cup portion packs. Increasing raw material costs could, however, affect GMCR adversely in the long run as all of these cost increases couldn’t be passed to customers.
• A lower than expected K-Cup demand in future due to increasing competition could result in associated inventory costs together with increased labor and overhead costs which could affect gross margins in the coming years.

Increasing Competition

The competition in the single-serve coffee segment is intensifying with many companies interested in grabbing a share of the growing market.

• Starbucks (NASDAQ:SBUX) has announced its plans to enter this segment with the launch of its new coffee maker Verismo.
• Sara Lee (NYSE:SLE) has also expressed interest in reinvesting in the single-serve coffee market. It plans to discontinue Senseo brewers in North America beginning March 31.
• Wal-Mart (NYSE:WMT) plans to introduce Esio Beverage System, a more reasonable line of brewers at its stores. Going by reports, the price per serving is expected to be much lower than the average cost of Keurig’s K-Cups, which range from 60 cents to 90 cents each.

With the entry of new players in the single serve market, the industry is expected to undergo swift changes in terms of prices, new products and technological advancements. There are an estimated 90 million households in the U.S. with a coffee maker of which GMCR only represents 12.2 million households. So we believe there is still an opportunity to expand.

We have updated our estimates for GMCR in accordance with the recent quarterly release. We have revised our brewer shipment estimates, K-Cups sales and capex estimates and have a Trefis price estimate of $44.86 for GMCR, implying a substantial premium to the current market price.

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