Expecting Slower Growth From Green Mountain With $45 Revised Estimate

We have revised our price estimate for Green Mountain Coffee Roaster’s (NASDAQ:GMCR) from $82 to $45. In this analysis, we focus on the two key drivers for GCMR, how our views have changed on them as-well-as trends that impact these drivers. GMCR is a high growth stock and the aggressive sales forecasts by management has built up high investor expectations on this stock. In coffee makers, GMCR competes with Robert Bosch, Nestle, Mars among others. In specialty coffee, it competes with Dunkin’ Brands (NASDAQ:DNKN), Starbucks (NASDAQ:SBUX) and Peet’s Coffee & Tea.

See our full analysis of Green Mountain Coffee Roasters here

A Look at the Key Factors:

K-Cup Portion Packs Sold

We have revised our estimates for K-Cup Portion Packs sold and believe that will growth will be more moderate. Our previous estimates were driven by GMCR’s dominant position in the single-serve market and continued strong growth in its K-Cup Packs Sold in line with historical volumes. We were highly optimistic about the prospects of K-Cup Portion Packs and assumed the robust growth to continue in the coming years.

However, the below mentioned factors and trends made us revise our estimates:

• GMCR’s growth strategy involves driving Keurig single-cup brewer adoption in North America in order to generate ongoing demand for K-Cup portion packs. It sells its brewers at prices which are approximately at cost, or sometimes at a loss when factoring in the incremental costs. In Q2, GCMR witnessed a sharp decrease in brewers sold vis-a-vis last quarter. This could be due to the slowing of demand for the type of brewing system offered by GMCR. We believe, if this trend continues, it could adversely affect the demand for K-Cup Portion Packs sold in future.
• The advent of competition from other prominent firms like Starbucks and Wal-Mart (NYSE:WMT) could play a crucial role in the future dynamics of the single-serve coffee industry. Wal-Mart and Starbucks could leverage their global presence and loyal customer base to grab a share of the growing single-serve market.

Brewers and Accessories Sold

GMCR has been pushing hard to drive brewer sales as this, in turn, drives sales of its higher margin K-Cup Portion packs. We previously anticipated a robust growth for brewer shipments in the coming years. GMCR’s dominant position in the single-serve market and persistent growth in the  single-serve market supported our estimates. However, we have modified our estimates and expect brewer shipments to cross 12 billion mark by the end of the forecast period.

• The introduction of new coffee maker, Verismo, by Starbucks and likely introduction of Esio Beverage, a new single-serve beverage maker, by Wal-Mart this spring could adversely affect the market share of GMCR, which presently controls more than three-quarters of the U.S. single-serve coffee market.
• The inventory built-up on GMCR’s balance sheet is alarming. In Q2 2012, it reported $602 million in inventories almost double than it reported in Q1 2012. Since it has more inventory on hand because of its failure to meet revenue projections, the inventory turnover is expected to be lower in the next quarter which is expected to pressurize prices.
• GMCR’s two key patents related to K-Cups are expiring in 2012 which could make it easier for competitors to replicate what Green Mountain is doing. Competitors have already expressed interest in entering the single-serve market.

Despite our lower estimates, we believe GMCR’s current stock price is highly discounted and doesn’t represent its true intrinsic value. There are still ample growth opportunities in the single-serve coffee market. It has been a strong contributor to the growth of the overall coffee market in the U.S. GMCR’s keenness to develop partnership opportunities, focus on innovation and R&D and its robust K-Cup Portion Pack brands portfolio will help it to emerge stronger. We are optimistic that GMCR will recover from its recent lows.

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