The Cheapest Coffee Stock in Town

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"There is no misconduct," CEO Larry Blanford said during Green Mountain Coffee Roasters' (NAS: GMCR) quarterly conference call last night, addressing the most salacious of hedge fund manager David Einhorn's recent knocks on the company.

Taking this long to defend itself against Einhorn's bearish thesis has roughed up the stock in recent weeks, but this morning's sell-off is the Keurig company's own handiwork.

For the first time in a couple of years, Green Mountain missed Wall Street's aggressive targets with its fiscal fourth-quarter results. Net sales may have climbed 91% to $711.9 million, and adjusted earnings climbed even faster to $0.47 a share. Most companies would love this kind of torrid growth, but analysts were banking on an adjusted profit of $0.48 a share. It's not a matter of the pros getting ahead of themselves; K-Cup demand also didn't live up to Green Mountain's own projections.

Investors may also be concerned with inventory levels growing much faster than net sales. A projected spike in capital expenditures this new fiscal year also isn't going to woo the naysayers.

Where do we go from here?
Despite the miss and chunky capex going forward, Green Mountain's outlook for fiscal 2012 is in line with where the pros are perched.

Green Mountain sees net sales soaring 60% to 65% for fiscal year 2011, and Wall Street's targeting a 61% spurt. Green Mountain's adjusted earnings per share guidance of $2.55 to $2.65 -- a 56% to 62% forecasted increase -- is in harmony with Wall Street's $2.62 a share estimate.

In a nutshell, one of the market's most overvalued stocks is now trading at a forward earnings multiple in the teens -- even though it continues to grow considerably faster than that rate would suggest.

Bears will argue that the real problem comes after fiscal 2012, when two of its K-Cup-related patents expire. However, it's not as if Green Mountain is asleep at the wheel there. It already owns many of the top K-Cup brands. It's also working on a new Keurig platform.

During last night's call, Green Mountain expressed its confidence in getting a second-generation Keurig out during fiscal 2012. In fact, $100 million of the projected $630 million to $700 million in capital expenditures earmarked for this new fiscal year will go to beefing up the portion-pack packaging capacity related to the new platform. This will be a new premium platform with new patents.

Green Mountain will continue to develop the existing platform. The company hopes to open the original platform to "new demographics," which basically means that the brewers will likely get cheaper as the off-patent K-Cups do.

Green Mountain will continue to profit from the original Keurig platform, but the real potential here is for coffee lovers to embrace the upgraded format.

Greener pastures
The sell-off is brutal, but Green Mountain is not a broken company. Starbucks (NAS: SBUX) finally began selling retail K-Cups this month. Dunkin' Brands (NAS: DNKN) and ConAgra's (NYS: CAG) Swiss Miss hit the K-Cup market this summer.

Beyond the two Keurig platforms that will be in operation by the end of this new fiscal year, Green Mountain continues to work with Italy's Lavazza on an espresso system.

I recommended Green Mountain to subscribers of the Rule Breakers growth newsletter service at a split-adjusted price of $8.93 a little over two years ago. It will take a lot of gloom and doom before that call is a loser, though I'm clearly not happy with being on the wrong side of this call in recent weeks.

However, would you believe me if I told you that the KO'd Keurig ambassador is the cheapest premium coffee stock at the moment? Going with the $44 price it was trading at last night, let's compare the forward earnings multiples of the publicly traded java junkies.

Company

Price

2012 EPS

2012 P/E

Peet's Coffee (NAS: PEET) $57.66$1.7932
Caribou Coffee (NAS: CBOU) $13.99$0.5028
Starbucks$42.95$1.8224
Green Mountain Coffee$44.00$2.6217

 Source: Yahoo! Finance.

Cynics will argue that there's more to this story than forward earnings estimates, and Einhorn singled out the questionable accounting and model sustainability concerns that go beyond being the cold stock in a hot sector.

However, none of these companies are growing at anywhere close to Green Mountain's pace. If we look ahead to the $3.87 a share that analysts see in fiscal 2013 -- which is now technically next year -- Green Mountain's earnings multiple drops to 11.

There is uncertainty here, and far more uncertainty than you will find in most stocks. However, it's hard to ignore the value that today's sell-off is presenting investors, since it's already discounting a lot of the shoes that may drop in the future.

If you want to follow this caffeinated saga, addGreen Mountain Coffee Roastersto My Watchlist.

At the time this article was published The Motley Fool owns shares of Starbucks.Motley Fool newsletter serviceshave recommended buying shares of Green Mountain Coffee Roasters and Starbucks.Motley Fool newsletter serviceshave recommended creating a lurking gator position in Green Mountain Coffee Roasters. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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