How Green Mountain Coffee Roasters Stays Hot in a Tough Market

It seems like there’s disappointment after disappointment followed by bad news followed by a more pessimistic economic outlook than the pessimistic economic outlook broadcast the day before until the financial pundits come back from commercial and the next segment leads off with another reason to be bearish.

Then comes another set of commercials imploring all Americans to hoard gold in an underground bunker that can withstand the force of an atomic bomb that is almost probably going to potentially perhaps destroy the world as we know it.

But, finding the good news amidst the bad takes some effort. And Mike Catalano, co-founder of Krueger & Catalano Capital Partners, a Houston-based money-management firm, likes one name that he sees in an ocean of red:

Green Mountain Coffee Roasters (GMCR).

“When the market peaked in the fall of ’07, GMCR was trading around nine bucks,” he tells Minyanville. “Today, it’s $32 -- up fourfold, when most others are down 30-40%. A company that’s actually up from the 2007 peak is an incredible find.”

Catalano points out that Green Mountain not only owns Keurig, the company that makes the coffee machines that use the convenient K-Cups seen in many offices (and homes -- and yes, GMCR is working on making them “greener” -- but Green Mountain Coffee Roasters also owns the patent to the K-Cup design and technology (33 domestic and 73 international in all), which it not only uses for the Green Mountain brand (which includes not only Green Mountain coffee, but Newman’s Own, Timothy’s, Tully’s, Caribou Coffee, Café Express, Donut House, and Celestial Seasonings teas) but collects licensing fees on from all other companies packaging and selling their product in K-Cups, at a rate of $0.06 per cup.

The licensing agreements are certainly lucrative. Kraft (KFT) agreed to pay Keurig a lump sum of $17,000,000 for a limited, non-exclusive license under certain Keurig patents. Jarden's (JAH) Mr. Coffee brand has licensed Keurig technology and J.M. Smucker (SJM) will be releasing Folgers and Millstone coffee in K-cups this fall. Cuisinart brewers with Keurig technology were released earlier this year. Celebrity chef Wolfgang Puck is getting ready to release a line of branded coffee in K-Cups.

“GMCR has only penetrated about 6% of the market so far,” Catalano says, “So they have plenty of room to grow. The Keurig machines are flying off the shelves and once you’re using the machine, you’re using the K-Cup. It’s the classic Gillette (PG) razor/razor blade model.”

The numbers in GMCR’s latest 10-Q, released on August 5, confirm that the machines -- and the K-Cups -- are selling at a brisk pace.

To wit:
 

Keurig segment net sales, after intercompany eliminations, increased by $67.1 million, or 74%, to $157.2 million in the third quarter of fiscal 2010 as compared to $90.1 million reported in the prior year period, with approximately two-thirds of the increase driven by K-Cup sales to retailers and consumers.

During the third quarter of fiscal 2010, K-Cup portion packs shipped system-wide by all Keurig licensed roasters was 683 million, an increase of 72% over the prior year period. Additionally, there were 846,000 system-wide brewers with Keurig-branded brewing technology shipped during the third quarter of fiscal 2010 as compared to 444,000 shipped during the prior year period.

Green Mountain’s Specialty Coffee Business Unit, the division that handles the actual coffee itself, after intercompany eliminations, “increased by $53.9 million or 54%, to $154.3 million in the third quarter of fiscal 2010 as compared to $100.4 million in the prior year period. Over 90% of the increase in SCBU’s net sales was due to higher K-Cup sales.”