Apparently reports of the demise of Green Mountain Coffee Roasters (Nasdaq:GMCR) have been at least a little exaggerated. While the market pioneer for single-serve coffee brewing has some formidable challenges coming from increased competition, it's worth remembering that the consumer products market is not like the prescription drug market where generic launches immediately drive prices into the cellar. That said, it's not as though Green Mountain's valuation marks this out as an especially cheap stock today.

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Strong Results for the Fiscal Fourth Quarter
Green Mountain closed the year with a solid beat on the top line, as revenue increased 33% and beat the average sell-side guess by about 5%. While royalty and "other" revenue declined 21%, brewer sales were up 30% and single-serve pack revenue increased 47%.

Profits were also solid. Gross margin did soften (down about two points), but the company also kept a reasonably firm hand on operating expenses. On balance, then, operating income rose 35% and the company posted an operating earnings beat of about 11 cents relative to analyst estimates (the other 5 cents of the beat was "below the line" items).

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Everybody's Optimistic, but Can Everybody Be Right?
It's hard to find a player in the coffee market who doesn't think they have a good platform for the single-serve market and bright prospects for taking lucrative amounts of market share. At the risk of stating the obvious, they're not going to all be right.

Kraft Foods (Nasdaq:KRFT) seems to think that the single-serve market isn't going to be all that hard to penetrate, and Treehouse (NYSE:THS) was pretty optimistic at its recent analyst day that it would emerge as the No.1 player in the private label side of the market. Starbucks (Nasdaq:SBUX) has its own high-pressure system that it will be rolling through retailers like Williams Sonoma (NYSE:WSM), Macy's (NYSE:M) and Sur La Table.

And then there's Green Mountain, which believes that these competitors will only get about 5 to 15% of the market over the next few years. Green Mountain partner J.M. Smucker (NYSE:SJM) has reiterated that position, though a cynic can ask whether that's their internal belief or just their role in supporting a partner.

One factor that should work in Green Mountain's favor is that it's not exactly cost-free to launch these products, and that cost, coupled with Wall Street's obsession with margins and EPS leverage, may leverage just how much these newcomers can compete on price. Likewise, retailers are going to carry only so many SKUs from so many competitors.

But a Lot Can Still Go Wrong
It's true that consumer products aren't like prescription drugs; the expiration of Green Mountain's patents doesn't mean that competition is going to drive the prices down to 20% of their former level in a year. That said, that doesn't mean Green Mountain is in the clear either.

Green Mountain's growth expectations for market growth still seems pretty aggressive, and I wouldn't be quick to write off Starbucks or Nestle (OTC:NSRGY) and their systems. Also, Green Mountain has pretty robust margins by food company standards, and I question whether recent deals like the one the company signed with Costco (Nasdaq:COST) are forcing Green Mountain to trade margin for market share.

The Bottom Line
If for no other reason than the fact that some investors seem to live to engage in flame wars on message boards, I doubt that the controversy about Green Mountain Coffee Roasters is going to abate anytime soon. For my part, I only care about finding stocks where I think I can identify money-making opportunities with favorable risk-reward trade-offs, and that's where Green Mountain still doesn't work for me.

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Even with robust growth assumptions (over $9 billion in revenue in 2022, and free cash flow margins consistent with the packaged food industry leaders), these shares just don't look cheap today. While the high level of short interest in this stock and the timing of competitive launches and promotional support means that there could be more than enough volatility to push these shares into value territory in the next three to nine months, the price today leaves me on the sidelines.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Tickers in this Article: GMCR, KRFT, SJM, SBUX

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