Green Mountain Coffee Roasters (NASDAQ:GMCR) recently announced its Q3 results with approximately a 21% increase in sales over the same period last year. This growth was driven by an impressive 31% and 32% yoy growth in sales in single-serve packs and brewers and accessories respectively. However, the other products and royalties segment witnessed a decline of 27% yoy due to the sale of the Filterfresh business in October last year. Following the earnings release, the share price has ballooned by almost 20%.
We have revised our price estimate for GMCR from $45 to $33, still implying a premium to the current market price. We have updated GMCR’s net debt position, according to the latest balance sheet numbers. We have also adjusted our estimates for brewers, k-cups, capex and tax in accordance with the latest earnings release.
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Strong K-Cup and brewer sales
GMCR witnessed solid growth in sales in K-Cups and brewers and accessories. In Q3, GCMR reported $638 million in sales for single-serve packs which was driven by 28% increase in sales volume and a 3% increase in K-Cup net price realization. It sold 1.4 million brewers this quarter with approximately 27% increase vis-a-vis the same period last year.
New trade flow model to estimate demand
GMCR has re-devised its forecasting methodology to help it better predict K-Cup demand annually. In the past, it has failed to gauge the demand for K-Cup portion packs leading to a huge inventory build-up. The management has asserted that the disconnect in single-serve demand versus GMCR’s expectations was not due to a slow-down in demand for its brewers from consumers.
Opportunities for growth in the single-serve market
Despite increasing competition in the single-serve industry, we believe there is still ample scope for growth for competing firms. According to a research conducted by GMCR, there are 10.8-12.2 million Keurig brewers active in US households as of March 2012, representing only 10% of the estimated 90 million US households that own a coffee maker.
The consumer adoption of the single-cup brewers is on rise. According to National Coffee Association (NCA), the ownership of single-cup brewers increased to 10% from 7% in 2011. 
Outlook for 2012-2013
- The company has lowered its capex guidance for 2012 to $475-$525 million, down from prior estimate of $525-$575 million and expects sales growth of 43-45% for fiscal 2012. However, for 2013, it expects sales growth of 15% to 20%.
- The company expects to generate positive free cash flow in 2013 and has authorized share repurchase up to $500 million over the next two years.
We believe GMCR’s current stock price is discounted and doesn’t represent its true intrinsic value. There are still ample growth opportunities in the single-serve coffee market. GMCR’s strategic partnerships and its robust K-Cup portion pack brands portfolio will help it to emerge stronger.Notes:
- Source: Earnings Transcript [↩]