For years, investors seemed as addicted to Green Mountain Coffee Roasters (symbol GMCR) as customers were to its joe. From a split-adjusted low of $2.80 in 2006, the stock soared to $116 before peaking last summer. But the price has been sliced in half since hedge-fund manager David Einhorn slammed Green Mountain. His reservations: Growth opportunities are limited; the expiration of patents will eat into its lucrative K-Cup business; and the firm’s financial results are sketchy. But have investors overreacted, and is the stock now a buy?
Green Mountain sells single-cup coffee makers and K-Cup coffee packets, as well as roasted coffee. Profits took off after the firm bought Keurig, a maker of single-cup brewers, in 2006. Green Mountain, which earned $8.4 million, or 7 cents per share, in the fiscal year that ended September 2006, made $249 million, or $1.31 per share, in the year that ended last September, with K-Cups accounting for 70% of profits.
But the firm’s K-Cup patents expire next September. That could let rivals push down prices and steal sales. Longbow Research analyst Alton Stump, who rates the stock a “buy,” says patent problems won’t pressure profits until 2013.
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Bears say the company manages inventory and expenses poorly and has engaged in fraudulent accounting. That’s hard to prove, but the feds have been investigating Green Mountain’s financial reporting for a year.
Bulls argue that K-Cup sales are picking up now that Green Mountain sells them in groceries, Walmart and Starbucks. But with more competition coming and an accounting cloud hanging over the company, investors expecting more double-espresso jolts of profits are likely to be disappointed and should avoid the stock.
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