Never Mind Starbucks: Green Mountain Coffee Is Worth the Beans

Green Mountain Coffee Is Worth the BeansMany of us cannot start off the morning without a cup of coffee. I know I can’t.

In the equities market, my stock analysis is that Starbucks Corporation (NASDAQ/SBUX) is the dominant player on the retail side, especially with its aggressive growth strategy in China (read “China: New Leadership, Focused Growth”), along with its recent acquisition of tea store chain Teavana Holdings, Inc. (NYSE/TEA).

While I do like Starbucks as a long-term play, my stock analysis is that a mid-cap coffee wholesaler that has a better risk-to-reward profile is Green Mountain Coffee Roasters, Inc. (NASDAQ/GMCR), a producer of higher-end specialty coffees and a single-cup brewing system. The stock is well up from its 52-week low of $17.11, but I feel there is more room for growth as the company goes forward and executes, based on my stock analysis.

Green Mountain sells hundreds of varieties of coffee, tea, and other beverages that are used in single-cup brewing machines, including the company’s “Keurig K-Cup” single-cup brewers. Green Mountain also offers whole bean and ground coffee in bags.

Coffees are sold under the Van Houtte, Brûlerie St. Denis, Brûlerie Mont-Royal, and Orient Express brands. The company also licenses coffee from Bigelow and Wolfgang Puck.

Yet this former high-flying stock has been under extreme pressure on concerns of increased competition in the single-cup business, as well as its coffee bag sales.

Green Mountain traded as high as $115.98 on September 20, 2011, but steadily fell to a 52-week low of $17.11 on July 23 before its subsequent surge to nearly $40.00.

I view Green Mountain as a contrarian play that could return some strong gains if the company can continue to grow its operations, based on my stock analysis.

Revenues increased in 10 straight years, from fiscal 2002 to fiscal 2012.

In fiscal 2012, revenues surged 46.0% after nearly doubling in fiscal 2011. Going forward, revenues are estimated to grow 16.6% to $4.5 billion in fiscal 2013 and 13.0% to $5.1 billion in fiscal 2014, according to Thomson Financial. These are strong growth metrics, according to my stock analysis.

On the earnings side, the company reported annual growth in each fiscal year with the exception of fiscal 2005 to fiscal 2006. Annual earnings surged from $597 million, or $0.06 per diluted share, in fiscal 2002 to $362.63 million, or $2.40 per diluted share, in fiscal 2012.

According to Thomson Financial, the company is set to see its earnings rise to $2.68 per diluted share in fiscal 2013 and $3.07 per diluted share in fiscal 2014.

My stock analysis is that Green Mountain is trading at a reasonable 12.88X its estimated fiscal 2014 earnings and an undervalued price/earnings-to-growth (PEG) ratio of 0.76. In comparison, Starbucks is trading at 20.34X and 1.33, respectively.

The near-term picture is moderately bullish, based on my technical analysis. The stock is trading above its 50-day moving average (MA) of $27.24 and its 200-day MA of $30.96. My stock analysis is that Green Mountain is showing a bullish bias on above-average relative strength.

An upward move could see the stock reach its 13-week high of $42.60, $50.00, and $70.00.

GMCR Green Mountain Coffee Nasdaq stock market chart

Chart courtesy of www.StockCharts.com.

If you are on the lookout for a contrarian play, Green Mountain may be your cup of java and the next of the stock market winners, based on my stock analysis. However, note that this is not a specific recommendation to buy at this point; just an example of the type of winning stock investors should seek out.