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ozzfan1317 (78.67)

Why Green Mountain Coffee Is Cheap

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March 01, 2011 – Comments (2) | RELATED TICKERS: GMCR , KO , PEP

Green Mountain Coffee Roasters  GMCR is a company that is demanding a premium from the market. It has been argued the trailing valuation looks expensive so this is an obvious short. Unfortunately this view leaves out the wild card of the hyper growth model. Even better their business model is based on the razor and razor blade methodology. Having a recurring revenue stream greatly reduces their overall risk as Keurig seems to be growing ever more popular every day. Operating income has grown from $18.1m in 2006 to $138.8m in fiscal 2010, and net income per share has grown from 8 cents per diluted share to 58 cents per diluted shares. This level of consistent year over year performance is worth paying a premium for. In my opinion their stock is still cheap and represents a compelling play in the specialty coffee market. I know I am arguing that a stock trading at 80 times trailing earnings is cheap and you will want to see a pretty compelling argument as to why I believe this. I implore you if you are short read this article and close out your position. You can learn more about the company here. My reasons for why the stock is cheap are stated below.

Brand Recognition


A brand name really cannot be given an arbitrary number. Green Mountain and its collection of brands are well known, loved and its consumer base is not price sensitive giving them premium pricing power. I personally have had fellow college students tell me they love the coffee. Popular specialty brands include Green Mountain Coffee Roasters, Newman's Own and the newly acquired Canadian presence Van Houte.The company even raised prices recently and yet sales continue to be strong. Brand loyalty is priceless.


Management


Insiders hold a good number shares and their founder still has a substantial stake. This large amount of share ownership aligns management to act in a way that creates value for shareholders. Return on equity and return on investments is positive with return on equity above 12 percent. Book value has consistently grown over the years as well.


Valuation Compared To Growth


Trailing metrics look expensive but when you look at forward metrics the valuation improves dramatically. Green Mountain trades at 33 times forward earnings while still growing at more than 50 percent. In the most recent quarter and even for this past year revenues grew at 67 percent while earnings grew at nearly a 70 percent rate. A price to earnings growth ratio below 1 usually gives you a stock that is noticeably cheap.



Discounted Cash Flow Analysis

A ten year cash flow analysis assuming a moderate slowing of growth places fair value at 53 dollars a share. This is assuming current growth slows as of right now growth is accelerating. Book value is 6.77 a share and the assumptions used were half of the current growth rate. Fair Value may even be higher than my calculation.




Conclusion

Trailing metrics might look expensive but in all honesty Green Mountain's valuation is quite reasonable. Apply some forward thinking and when combined with a strong and growing brand this makes Green Mountain Coffee Roasters a compelling buy today.

 

 

This is also posted on my Seeking Alpha account link below.

 

 Disclosure I am Long GMCR

2 Comments – Post Your Own

#1) On March 01, 2011 at 4:53 PM, ozzfan1317 (78.67) wrote:

http://seekingalpha.com/instablog/577217-ozzfan1317/141690-why-green-mountain-coffee-roasters-is-too-cheap-to-ignore

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#2) On March 10, 2011 at 1:41 PM, ozzfan1317 (78.67) wrote:

I told you the stock was cheap :)

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