That’s low double-digit growth in three quarters. In six quarters in 2010 through 2011, Green Mountain’s revenue doubled and its net income rose nearly 150%. Even the three quarters prior to our Green Mountain call showed incredible growth:
GMCR Revenue TTM data by YCharts.
So, just to recap: Before our call, growth was like a hockey stick. After our call, growth was more like a pleasant ride up a small, flattish hill. Green Mountain’s latest estimates for the rest of its 2013 fiscal year, which project between 15% and 20% growth in revenue and between $100 million to $150 million in free cash flow, are rather disappointing in light of its recent results and the $300 million in free cash flow booked over the past four quarters. The company’s annual earnings estimate goes up to $2.82 per share, which is a big upgrade from its last guidance and also represents a solid 18% upside from 2012’s adjusted earnings per share of $2.40.
Making this harder is the fact that, despite the huge valuation-driven rebound, Green Mountain is still less expensive than its peers. Starbucks has that perpetual 30 P/E. Dunkin’ hasn’t dropped below 40 for a year. Sodastream International Ltd (NASDAQ:SODA), which makes a comparable at-home product for soda fans, sits at a P/E 33% higher than Green Mountain’s — although given its far more ambitious guidance, that’s not too surprising. Heck, even The J.M. Smucker Company (NYSE:SJM), which makes Folgers, is valued more highly than Green Mountain despite the fact that analysts expect less growth from it than they do from Green Mountain.
GMCR P/E Ratio TTM data by YCharts.
This is emphatically not an expensive stock, even after more than doubling in little over six months. A respectable growth rate, reasonable valuation, and a positive (albeit lower) cash flow from a historically cash-flow-negative company all seem like good reasons to hold on for the time being. We almost certainly won’t see another double, but this stock should still outperform the index for a while.
Sean’s take
Another earnings report down and all the more reason to believe that Green Mountain is back on track. The company’s first-quarter report, while received poorly by investors, gave me every indication that Green Mountain’s management understands what it’s going to take to keep your friends close and your enemies closer.
Heading into this report, which encompasses those all-important Christmas months for retailers, I’d been concerned with the impact Starbucks’ new single-serve brewing machine, the Verismo, would have on the Keurig brewer, as well as whether or not Green Mountain would finally get its inventory levels under control. Needless to say, I wasn’t disappointed on either end.
A slight drop in gross margin for its Keurig brewing system due to rebates might set off the “warning” alarm for some investors, but I see it a bit differently. If Green Mountain can continue to undercut the Verismo in price — which it really should have no problem doing since the individual serving pods for the Verismo cost $1, while K-Cups are priced about 30% cheaper — then the rebates are well worth it in the long run. It’s also worthwhile for Green Mountain to roll out rebates now when coffee prices are at multiyear lows — it’s some of the cheapest loyalty points money can buy!
