Last Call for Green Mountain?


Things haven't been easy for Green Mountain Coffee Roasters (NAS: GMCR) lately. Shares of the company behind the Keurig single-cup coffee brewers hit a fresh two-year low yesterday after grocery store giant Kroger (NYS: KR) revealed that it will be cranking out its own one-cup portion packs later this year.

Kroger's news doesn't really come as a surprise. Important K-Cup patents expire in three months, and stores will be quick to put out store brands given the platform's shelf-widening popularity. Even Green Mountain pointed out last week that it's exploring making private-label K-Cups for store brands in the future if it makes financial sense.

The timing of yesterday's hit is cruel. Today Starbucks (NAS: SBUX) being selling its own K-Cups in its stores as part of its deal with Green Mountain. Some were speculating that Starbucks would wait until the fall -- when Green Mountain can no longer collect royalties on third-party K-Cups -- or not stock them at all as it waits to introduce its single-cup espresso maker before the holidays.

Starbucks K-Cups have been available through several retailers since late last year, but the in-store presence has to be a welcome form of validation for battered Green Mountain shareholders.

Grounds for divorce
Sizing up the relationship between Starbucks and Green Mountain has never been easy. They are rivals, yet they are both growing quickly in a market of expanding java consumption.

Net revenue grew 15% at Starbucks in its latest quarter, as comps for the barista baron rose a hearty 7%. Green Mountain saw net sales and earnings climb 37% and 42%, respectively, in its latest quarter. Clearly there's more than enough market to go around with this growing pie, but it will still be odd to see latte seekers stumbling into Starbucks today to find K-Cups on the counter.

Yes, Starbucks has sold its own VIA instant coffee for some time, but all that requires is access to hot water. Offering K-Cups -- even if it's under the Starbucks brand -- requires the purchase of a Keurig appliance to brew the warm goodness.

Does Starbucks really want to be the destination for people looking to pick up premium coffee to make at home? Does the empire want to risk folks working out the quick math on what home-brewed VIA or K-Cups cost relative to the company's pricier blasts of caffeinated bean water?

Things will get interesting, especially later this year when Starbucks introduces its espresso-centric single-cup coffeemaker. Between VIA, K-Cups, and the Verismo machines and refills, Starbucks will have to make sure that it sends the right message as its stores become a hub for coffee lovers who may not want a cup of joe right away.

Scaling a mountain of green
Starbucks isn't the only one that will have to a little repositioning.

Green Mountain needs to convince the market that there's life at the other end of the K-Cup patent expirations.

A logical move would be to increase the price of its brewers at a time when K-Cups are about to get significantly cheaper. K-Cups already cost less than the niche espresso-based one-cup platforms that use high water pressure to brew fancy coffee drinks. The gap is going to widen later this year once third parties dive in and Green Mountain isn't there to collect royalties on every K-Cup.

K-Cup patent expirations will make Keurig more popular, but it will be up to the company itself to prove that it can make it more profitable. If it can't squeeze more margins out of the razor when the blades go on sale, Green Mountain is going to be in for more pain.

It probably won't get that far. Green Mountain is still expected to grow through all of these challenges, and you won't often find companies that are growing this quickly fetching nine times this fiscal year's projected profitability and less than seven times next year's target.

As cheap as K-Cups are about to get for consumers, the stock of the company that will continue to own Keurig-related patents is even cheaper. As long as the fundamentals don't snap to the point where earnings growth reverses, it's hard to see Green Mountain head too much lower than it is today.

Brew ha ha
Shares of Green Mountain have still handily beat the market since I originally recommended the java heavy to Rule Breakers subscribers three years ago. It's lost a lot of ground -- and grounds -- lately, 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 thisarticle was published 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.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 writing covered calls on Starbucks.Motley Fool newsletter serviceshave recommended creating a lurking gator position in Green Mountain Coffee Roasters. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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