Green Mountain’s Troubled With Many Problems But They Are Priced In

GMCR: Keurig Green Mountain logo
Keurig Green Mountain

While Green Mountain Coffee Roasters (NASDAQ:GMCR) struggles with increasing competition, it still represents an attractive investment opportunity given its dominance in the U.S. single-serve industry and its robust K-Cup Portion Pack brands portfolio. Our current price estimate of $45 stands at a premium of about 74% to the market price. We are optimistic about GMCR’s keenness to develop partnership opportunities, its focus on innovation and R&D, and its K-Cup Portion Pack brands portfolio. We discussed these in a recent note titled Expecting Slower Growth From Green Mountain With $45 Revised Estimate. We believe these efforts will help the company recover from its recent lows triggered by some of the difficult factors detailed below.

See our full analysis of Green Mountain Coffee Roasters here

Increasing competition

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Competition in the single-serve coffee segment has intensified with many companies interested in entering this growing market. Recently, Starbucks (NASDAQ:SBUX) announced its plans to enter this segment with the launch of its new coffee maker Verismo. This development is clearly a huge threat for GMCR. Likewise, Sara Lee (NYSE:SLE) has also expressed an interest in reinvesting in the single-serve coffee market.

Wal-Mart (NYSE:WMT) also plans to introduce Esio Beverage System, a more reasonable line of brewers at its stores. The price per serving is expected to be much lower than the average cost of Keurig’s K-Cups. Wal-Mart and Starbucks could leverage their global presence and loyal customer base to grab a share of the growing single-serve market.

Inventory pile up

The inventory build-up on GMCR’s balance sheet is concerning. In Q2 2012, it reported $602 million in inventory, almost double of what it reported in Q1 2012. Since the company has more inventory on hand because of its failure to meet revenue projections, the inventory turnover is expected to be lower next quarter. This will likely lead to pricing pressure.

SEC inquiry

GMCR is facing an inquiry by the U.S. Securities and Exchange Commission (SEC) related to its revenue recognition practices and its relationship with one of the vendors. This has raised questions on the company’s accounting practices and has impacted GMCR’s reputation among its investors.

Dependence on a single supplier

GMCR depends on a single manufacturer in China for the manufacturing of its single-cup brewers. This puts it at significant risk as any disruption in the operations of this manufacturer or unexpected changes in the Chinese economy could adversely affect GMCR’s operations.

Patent expiration

The company’s two key patents related to its K-Cups are expiring in 2012, which could affect its future operations. Competitors will find it easier to replicate what Green Mountain is doing, thereby adversely impacting GMCR’s dominance in the U.S. single-serve coffee market.

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