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How to Play Green Mountain: Does It Still Control the K-Cup Market?

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What to watch for in today's earnings report.

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Green Mountain Coffee Roasters, Inc. (NASDAQ:GMCR) is scheduled to release earnings this afternoon, May 8, after the closing bell. The company was recently tested by the expiration of its patent for the K-Cup formatting for its wildly successful single-serving coffee makers; according to analyst sentiment, GMCR has emerged largely unscathed. In fact, in the time since this potential setback took place, the company has not only appeared to maintain sales figures (though this may be due, in part, to a sluggish response from competitors), but it has also managed to earn further accolades from consumer analyst groups for innovation and brand strength. Green Mountain Coffee Roasters has maintained a stable EPS expectation for this release, but analysts have improved the long-term outlook for GMCR stock.

This quarter's earnings report will likely demonstrate whether or not GMCR is capable of maintaining a high degree of control in the K-Cup market. Competitors like Kraft (NASDAQ:KRFT) have begun to threaten large-scale shifts into the single-serving coffee market, especially as Keurig coffee makers have become more accessible to the average consumer. GMCR has responded to these threats cautiously, cutting costs where it can and laying off a small percentage of its workforce. The cost saving measures in which the company is engaging are valuable, but perhaps less so than are the new expenditures taken on in the face of falling coffee prices. Green Mountain has chosen to convert many of its more popular blends so that they use only fair-trade beans, whereas Starbucks (NASDAQ:SBUX) and others have begun to cut prices. The success of this move will not likely be immediately apparent, but it will need to be taken into account alongside the K-Cup concern, as many feel a price cut on the "pods" would deter entry into the market.

Green Mountain have beaten earnings expectations in three of the past four quarters, including the first full quarter after the relevant patents expired. Forbes expects this release to show year-over-year profit growth of over 15%, and analysts surveyed gave the stock a 64.8% buy rating, a rating that has improved over the last three months. Green Mountain's closest competitors average a 62.8% buy rating. This belief in Green Mountain suggests that the company will maintain a high degree of control over the K-Cup market, and that the new Vue machine and its specialized "cups" have -- and will continue to -- adequately replace most (if not all) market share that could be lost in the K-Cup market.

The Trade: Buying the GMCR May 60-70 bull call spread for $2.65 debit
Risk: $265 per 1 lot
Reward: $735 per 1 Lot
Breakeven: $62.65

Greeks of this Trade:
Delta: Long
Gamma: Long
Theta: Short
Vega: Long
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