Green Mountain Has Plenty to Prove Tomorrow

The bean counters at Green Mountain Coffee Roasters (NAS: GMCR) are on the clock.

The company behind the wildly popular Keurig coffee brewers and the K-Cup ecosystem that fuels caffeinated blasts in one-cup doses reports its quarterly results tomorrow.

It's easy to be worried.

  • At least one analyst chimed in last month with problematic channel checks, suggesting waning demand.
  • There were more than 28 million shares sold short as of mid-April, Green Mountain's highest short interest since late last year.
  • Between K-Cup patents expiring in September and Starbucks (NAS: SBUX) introducing its Verismo single-serve brewer shortly thereafter, the holiday outlook starts to get gloomy.

This would seem to be a perfect time for longs to panic, but it may also be the right time for opportunistic bulls to get excited.

Let's take a closer look at the catalysts that the pessimists appear to be missing.

This bear's been wrong before
Stifel Nicolaus was concerned after checking in with more than two dozen Big Lots (NYS: BIG) locations across the country. Spotting K-Cup flavors selling at 25% off average retail prices is problematic, but why are we surprised by markdowns when arabica bean prices are at a 17-month low?

Sure, it's not encouraging to see premium coffee selling at a major retailer of closeouts, but how is this an indication of Keurig's decline in popularity? There are far more companies making K-Cups these days. Starbucks and Dunkin' Brands (NAS: DNKN) hopped on the bandwagon just last year. It's going to be crowded and competitive for the makers of K-Cup refills, but pricing disparities ultimately make a Keurig brewer that much more attractive to consumers.

And what does it say if Big Lots is even stocking K-Cups in the first place? Isn't this more validation for the Keurig platform?

However, the biggest reason to take the Big Lots presence lightly is that -- back in December -- Stifel's Mark Astrachan was also concerned about brewer shipments from Green Mountain's Chinese manufacturer declining in October and November and K-Cups popping up at dot-com discounter (NAS: OSTK) . What would seem to be a brutal holiday quarter turned into a blowout with revenue more than doubling and adjusted earnings more than tripling.

Shorts are food not friends
There were 17 million shares sold short when hedge fund rock star David Einhorn offered up his bearish rant on the company. The massive presentation called into question the quality of Green Mountain's earnings and accounting practices, concerns about inventory levels, and the all-too-popular fear about the two K-Cup patens expiring in September.

For now, Einhorn's call has been the right one. The stock has taken a big hit since its summertime highs. However, Green Mountain's stock is actually trading higher this year as the short position has been mounting.

Yes, Green Mountain shares are currently 10% higher year to date. Despite the Verismo threat, the stock has moved higher in 2012. Despite Einhorn's well-timed rant in October, Green Mountain's stock rose 36% for all of 2011. Despite having to restate its financials in 2010, the stock closed out that year 21% higher. Outside of a modest 5% drop in an otherwise brutal 2008, Green Mountain shares have risen every year since 2002.  

If you don't see the mounting shorts as a contrarian indicator, you're bound to miss the short squeeze on Thursday morning if tomorrow afternoon's report is another winner.

The future's so blight I have to wear shades
The patent expirations are real, but good luck telling that to the analysts who spend more time modeling Green Mountain's future earnings potential than most bears spend talking the company down. If anyone can put out a K-Cup come October without paying Green Mountain a few pennies, what's Green Mountain to do?

Thrive. Analysts see Green Mountain earning $2.67 a share this fiscal year ending in September. They see profitability expanding to $3.68 a share in fiscal 2013. Why stop there? Wall Street's target for fiscal 2014 is $5.20 a share and $6.23 a share in fiscal 2015.

Gee, if patent expirations are such a big deal, why do analysts see earnings nearly doubling in two years? Could it be that Green Mountain owns many of the premium coffee faves putting out K-Cups? Maybe it's the new Vue system that the company's rolling out with a fresh patent lifecycle. Maybe it's that cheaper K-Cup prices will lead to even more sales of Green Mountain's Keurig brewers which it can then start approaching as a profit center. Now trading at 13 times next fiscal year's projected profitability -- or less than eight times earnings if you're brazen enough to go out three years -- how bad will tomorrow afternoon's numbers have to be to pay off for the 28 million shares sold short?

It's not the bulls that should be panicking here.

Brew ha ha
Shares of Green Mountain have popped more than fivefold since I originally recommended the java heavy to Rule Breakers subscribers three years ago. It's clearly been a big winner for the growth stock newsletter service, but if you want to discover the newsletter service's next rule-breaking multibagger, a free report tells all. Check it out before it's gone.  

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

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