Green Mountain Coffee Roasters

For some time now, I’ve believed that Green Mountain Coffee Roasters Inc. (GMCR) has been over-valued by the market.

However, after this morning’s price crash of the stock, I reviewed the numbers, business information, and analyst reports and I believe that at the current price, the stock looks attractive.

The sell-off seems to be due to the company missing some sales numbers, particular wholesale order sales, but their explanation makes sense in that they had announced price increases previously so their wholesale customers stocked up in the previous period, therefore not needing to buy as much in the current period.

Makes a lot of sense to me. I would expect the miss to be worse than reported under the circumstances.

In our own business, ChamplainCoffee.com, we announced an increase of our low acid coffee and that month we had strong record sales and the next month sales fell flat. That was expected… we encouraged our repeat customers to stock up while the prices were low and they did.

The two real lingering issues with the company are expiring patents and accounting irregularities.

The Expiring Patents:

GMCR’s patent on K-cups expires in September 2012, which could allow competitors to make pods for GMCR’s Keurig machines, undercutting profit margins. GMCR has been making aquisitions and positioning their products to continue to thrive despite the patents. Starbucks, Dunkin and Smuckers have also struck deals with GMCR to produce K-cup based products for their companies, which means they will continue to have this revenue past the patent expiration. If they intended to produce their own it wouldn’t seem they would have made these deals within a year of the expiration.

Also, I don’t believe that the Starbucks and Dunkin deals have had time to impact earnings yet so these earnings could easily make up any loss due to the patent expiration.

The patent expirations also could help expand the market for k-cups as more companies make them to their standard, meaning more demand for Keurig brewers.

Accounting Irregularities:

Some mistakes have been made with accounting for costs. GMCR has been accused of accounting fraud. The SEC has investigated GMCR and has not uncovered much of anything in over a year of investigation.

If something serious should be uncovered, this could have a negative impact on the perceived value of the business and there will be serious trust issues with management.

Current valuation:

We initiated a small position today at $40.23 and may buy more if the price continues to fall and no real negative news comes out. Again the reaction to today’s news is overblown, psychological. Nothing has changed in the business just a shifting of buying habits that makes a lot of sense.

At the closing price of $40.89, the company has a Foward PE of 15.61 and PEG of 1.14.

Even some of the strongest critics of the stock previously would consider the price fair at today’s price.

Final thoughts:

The current valuation would be pretty good without any big threats to current income. Again, the patent expirations and accounting irregularities are the biggest threats to investing in GMCR, which makes this position a little more speculative than my other investments.

Therefore, I would suggest investing with caution.

I may use this as an opportunity to make a quick trade. It should be only a matter of time before the price pops up to a more unreasonable price again, at which time, I will probably sell to book a quick gain, but at this price or even lower prices and new threats, GMCR is good buy.