Fans of Green Mountain ( $GMCR ) and Lots More
Interview | SATURDAY, JUNE 23, 2012
http://online.barrons.com/article/...L_twm_fs#articleTabs_article%3D2
Purcell: We also like Green Mountain Coffee Roasters (GMCR), which has been in Wall Street's doghouse. It is a classic razor-blade business model. But this stock has been plagued by growing pains and a perception that the razor blade will be competed away once the key patent expires. The stock is down now from $112 last September to $20 recently.
In some ways, Green Mountain has been a victim of its own success. Six years ago, this company was no more than a coffee wholesaler with $200 million in revenue. It then acquired Keurig, which makes the K-cup coffee machine, and single-handedly created a whole new category in single-serve coffee. The idea was to aggressively place coffee brewers in as many homes as possible and then drive the consumption of their Green Mountain-branded coffee and other partner brands through the system. The strategy is brilliant. We expect Green Mountain's revenue this year to reach $4 billion, and it generates more than a 15% return on invested capital.
There's been a lot of skepticism about this company, including from famed hedge-fund manager David Einhorn.
Purcell: In the past few months, the company's hyper-growth led to challenges in managing the distribution channel. A year ago, retailers couldn't get enough product. When Green Mountain was seeing 100% year-over-year growth, given the rapid increase in both the number of brands that they were putting through the system and the number of doors through which they were selling, they lost their ability to forecast and just recently they had to reduce their near-term growth expectations. But the point-of-sale data reveal that consumer purchasing is still very strong, suggesting that this is an inventory-management issue and not related to end demand.
Investors have short memories. This is the same management team that virtually created and now dominates what now is the fastest-growing category in the grocery channel. Today, Keurig is in close to 12 million homes, but that's only 13% of total coffee-drinking households in the U.S. Last year, single-serve coffee makers represented 50% of the dollar sales of all coffee/espresso makers.
So the idea is that if you buy a Keurig, you are going to use Green Mountain's coffee?
Purcell: You are going to use either Green Mountain's coffee or one of their partner brands, which are almost all the major brands in the country. So one part of the short thesis is with this patent expiring for the K-cup in September, there is going to be competition from coffee brands wanting to make their own K-cup, basically circumventing the Green Mountain distribution system.
That is grossly exaggerated and somewhat misunderstood. Green Mountain has multiyear agreements with most of the branded producers, including Dunkin' Donuts, Starbucks, and Caribou Coffee. And this is important; the value proposition to the branded partner is access to Keurig's installed base, distribution channels, and next-generation products that many of the brands likely wouldn't be able to replicate. The brands would rather ride on the gorilla's back than fight the 800-pounder. And, finally, the fact that Starbucks recently agreed to a multiyear contract, on the eve of this patent expiration, speaks volumes.
What's this stock worth?
Purcell: Today, it has a market cap of only about $3 billion and net debt of about $400 million. It trades at less than five times enterprise value to Ebitda, which is around $750 million, and nine times this year's earnings of $2.38 a share. So for a company that will grow its top line close to 50% this year and at a rate likely north of 20% for the foreseeable future, something has to give. It is rare you get a chance to own the category killer in the fastest-growing category at this kind of valuation. So we see a double from here, and we think the bears have it wrong. |
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