Green Mountain Brews Up a Bitter Pot for Investors

Green Mountain coffee
Green Mountain coffee

If you like your coffee stocks like you like your arabica beans -- ground up -- then Wednesday night's report out of Green Mountain Coffee Roasters (GMCR) is the stock for you.

Shares of the company behind the Keurig coffeemaker and the K-Cup ecosystem that fuels premium java in single-service blasts crashed after an abysmal quarterly report. Green Mountain failed to live up to its earlier guidance, and its outlook for the balance of fiscal 2012 is even more disappointing.

Let's dive into the many reasons the stock is getting pounded.

1. A Public Company Is a Guidance Counselor

Missing Wall Street's forecast is bad, but when a company whiffs on the very outlook it issued three months ago, that's really bad.

Green Mountain's results appear fine at first glance. Net sales climbing 37% to $885.1 million and adjusted earnings soaring 33% to $0.64 a share would be a respectable showing for most companies. That's some pretty heady growth. The rub here is that Green Mountain told investors to expect a 45% to 50% spike in net sales for the quarter.

When a company issues guidance a month into a three-month period, investors come to trust the prognosis. Green Mountain had historically been conservative in its guidance, so it wasn't a surprise to see analysts gravitate to the high end of the java heavy's projections.

Green Mountain nailed Wall Street's profit target, but weakness in K-Cup sales (particularly the seasonal cider and hot cocoa beverages that struggled through a warmer winter than usual) and shipping fewer Keurig brewers than expected ate away at sales.

2. Inventory is out of control

A potential red flag for investors exists when inventory levels grow a lot faster than a company's sales. What can one make of inventory levels more than doubling at Green Mountain over the past year?

Green Mountain was stuck with too many brewers at a time when retailers were holding back on orders after overstocking during the holidays. The company was also taken by surprise given the slowdown in K-Cup sales to the point where it had to unload some of its stock.

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K-Cup sales rose 59% as a combination of a 47% spike in portion pack units and a 12% increase in prices. This is a big number, but the company was holding out for more. Starbucks (SBUX) and Dunkin' Brands (DNKN) didn't even begin selling K-Cups until well after last year's quarter came to a close. This could've been a blowout quarter, but instead the market blew it out.

3. Fiscal 2012 Is Going to Get Uglier

Three months ago, Green Mountain was looking at a profit of $2.55 a share to $2.65 a share for the entire fiscal year ending in September. Now it's looking to earn no more than $2.50 a share. The 60% to 65% surge in net sales is now being hosed down to between 45% and 50%.

The company's outlook for the current quarter -- Green Mountain's fiscal third quarter -- is also well below where analysts were perched, but at least you can't fault the company for that. This is the first time that it's offering up guidance for the months of April, May, and June.

4. Green Mountain Is Tightening Its Belt

Another subtle revision that speaks volumes is Green Mountain's goal for capital expenditures. Earlier this year the sultan of single servings was earmarking $630 million to $700 million for capital expenditures this fiscal year. Now the company is only looking to invest $525 million to $575 million in capital expenditures.

Some may applaud this move. It's right for the company to be prudent with its money. However, it's troublesome to see Green Mountain scale back its budget for expenditures while still lowering its bottom-line guidance.

Serving Up Some Sunshine

To end on a positive note, there were a couple of encouraging things mentioned during the call.

After some speculation that its Italian partner Lavazza was getting cold feet on a plan to jointly introduce an espresso-centric machine to attack that end of the market, Green Mountain revealed that it plans to put out the high-water-pressure system in time for this year's holiday shopping season.

Green Mountain also inked a new deal that will debut Eight O'Clock coffee in K-Cups this fall. Tetley tea and Good Earth tea will be available as K-Cups next year.

There's also a matter of the valuation. The stock has been knocked down to the point where it trades at an earnings multiple in the low teens based on this year's revised profit guidance. As difficult as it is to take the company's projections seriously now, the stock is growing at a healthier clip than its low forward P/E suggests.

These final few points won't be enough to win back jaded investors, but there are still some caffeinated kicks to be had in this 2012 laggard.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article, except for Green Mountain Coffee Roasters. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters and Starbucks; writing covered calls in Starbucks; and creating a lurking gator position in Green Mountain Coffee Roasters.

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