Caught in a tug-of-war between bulls and bears (with over 35% short float), Green Mountain Coffee Roasters Inc.
(NASDAQ:GMCR) has always gotten more than its fair share of attention. Most recently, the firm has gotten investors excited after reporting stellar Q2 earnings and renewing their partnership with Starbucks Corporation
For Q2, GMCR reported earnings of $.93 per share, which came in well above the $.73 per share consensus. However, revenue of $1 billion was slightly shy of expectations. Gross margin improved by approximately six points, and operating income increased by 41%. Guidance for the current quarter of $.71 - $.78 EPS was also better than the Street’s consensus view, but the firm did lower its full-year revenue forecast.
Starbucks and GMCR recently agreed to renew and expand their strategic partnership for manufacturing, marketing, sale, and distribution relating to Starbucks- and Tazo-branded single-serve packs (K-Cups) worldwide.
Under the new deal announced on May 8, Starbucks and GMCR will stretch their collaboration to include more brands and varieties for the single-serve cups it currently offers for the Keurig brewer, in an agreement set to last a minimum of five years. The new deal will approximately triple the number of Starbucks-branded items available for GMCR’s Keurig system — including Seattle’s Best and Torrefazione Italia coffees, Teavana teas, and Starbucks cocoa.
The deal certainly helps GMCR to have licensed, branded partners like Starbucks on hand to offset single-serve competition from private-label players like TreeHouse Foods Inc.
(NYSE:THS) and other entrants like Mondelez International Inc
(NASDAQ:MDLZ). Moreover, it doesn’t seem unreasonable to read this deal as a sign that Starbucks’ Verismo hasn’t taken the coffee world by storm.
Market IQ pro metrics give GMCR an Outperform rating (see below). GMCR’s quality is better than 91% of its peers; strong profitability, good cash flow from operations, and a pattern of positive EPS growth over the last two years warrants a high quality number (see below).
GMCR has a largely solid financial position and reasonable debt levels that outnumber 80% of its peers, along with a favorable debt/equity ratio; the company maintains an adequate interest coverage ratio, which illustrates its ability to avoid short-term cash problems.
GMCR shares have staged an impressive run in recent months, rising more than 70% in 2013 and outperforming the rise in the S&P 500
(INDEXSP:.INX) during the same period. The stock’s sharp appreciation has driven it to a valuation level, which is now expensive relative to its peers (see below).
Going forward, the company is optimistic about its future operations. The company says its US household penetration of 13% leaves plenty of upside for its Keurig brewers in the home and office, and expects its razor-and-blade model (making money off the single-serve cups, not the brewers) to continue delivering as adopters of the system buy brew packs.
GMCR’s earnings growth speaks to its continued strategic progress. However, despite bullish momentum flowing in GMCR’s favor, investors want to know about the financial terms of the firm’s agreement with Starbucks. How much is GMCR ceding to Starbucks to keep them invested in this relationship? As GMCR is essentially a razor-and-blade business model, that’s no trivial concern. In a worst-case scenario, one would fear that Starbucks is essentially just incorporating GMCR as another arm of its global distribution strategy.
This article was written by Adil Yousuf and originally appeared on Market IQ
An integrated solution to help you understand your investment's strengths and weaknesses quickly and effectively, the Market IQ Terminal offers investment analysis and portfolio optimization based on proprietary fundamentals, market sentiment, analyst sentiment, and technical parameters.
No positions in stocks mentioned.
This commentary is for informational purposes only and does not constitute investment advice. The opinions offered herein are not recommendations to buy, sell or hold securities. Market IQ expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.