With shares of Green Mountain Coffee Roasters (NASDAQ:GMCR) trading at around $78.39, is GMCR an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock’s Movement
Green Mountain was given an OUTPERFORM rating here on March, 26, 2013, at $54.96. But is it still an OUTPERFORM after its impressive run? This stock has a large short position of 37.90 percent, but shorts have been torched so far. However, many of them are maintaining their positions due to fundamentals. Then again, are the fundamentals really that bad?
Margins are solid, free cash flow is expected to increase, there are no debt issues, costs have decreased, revenue has been strong, and earnings have been steady. In addition to those factors, guidance is strong, the deal with Starbucks Corporation (NASDAQ:SBUX) has been extended for five years, and analysts like the stock: 9 Buy, 4 Hold, 1 Sell.
From a bearish perspective, sales growth has been declining, sales guidance has declined to 11-14 percent from 15-20 percent, and Keurig brewer sales have declined 9 percent. On the surface, it would look as though there is a strong bear case due to slowing growth, but Green Mountain works in clever ways. For instance, if it looks as though the next quarter is going to be a disappointment, then the company may find a way to release positive news in order to overshadow the negatives. If it has been done once, then it’s likely to happen again. Green Mountain doesn’t have a ton of cash, so the options are somewhat limited, but Green Mountain’s creativity shouldn’t be underestimated.
A look at a company’s culture can provide an important an inside look at the operation. According to Glassdoor.com, Green Mountain employees have rated their employer a 3.4 of 5, which is above average. Two other stats are also above average: 75 percent of employees would recommend the company to a friend, and 83 percent of employees approve of Lawrence J. Blanford.
The chart below compares fundamentals for Green Mountain, Farmer Brothers Co. (NASDAQ:FARM), and Starbucks.
|Operating Cash Flow||712.31M||24.94M||2.55B|
Let’s take a look at some more important numbers prior to forming an opinion on this stock.
T = Technicals Are Strong
Green Mountain has outperformed its peers for every time frame listed below.
|1 Month||Year-To-Date||1 Year||3 Year|
At $78.39, Green Mountain is trading well above its averages.
E = Equity to Debt Ratio Is Strong
The debt-to-equity ratio for Green Mountain is stronger than the industry average of 0.80. Debt isn’t a concern at the moment.
E = Earnings Have Been Steady
Earnings and revenue have consistently improved on an annual basis.
|Revenue ($) in billions||0.500||0.786||1.36||2.65||3.86|
|Diluted EPS ($)||0.1933||0.45||0.58||1.31||2.28|
When we look at the last quarter on a year-over-year basis, we see an increase in revenue and earnings. Revenue and earnings have also improved on a sequential basis.
|Quarter||Dec. 31, 2011||Mar. 31, 2012||Jun. 30, 2012||Sep. 30, 2012||Dec. 31, 2012|
|Revenue ($) in billions||1.16||0.885||0.869||0.947||1.34|
|Diluted EPS ($)||0.66||0.58||0.46||0.5808||0.70|
Now let’s take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?
Green Mountain’s growth might be slowing, but with a strong management team in place, innovation and finding creative ways to move the stock price are possibilities. Of course, long-term investors would prefer to see innovation for more sustainable results.
It’s also important to remember that we’re in a dartboard market – throw a dart at a newspaper with a list of stocks on it and you’re likely to make money. Heavily shorted stocks have been performing exceptionally well. There is no telling how long this environment will last. Perhaps a black swan event will shut it all down, and from a global economic perspective regarding demand and revenue, none of it makes sense, but in the meantime, the trend is up.
It’s possible that Green Mountain’s next quarter disappoints, but if the broader market continues its surge, what’s going to drag the stock down? At the moment, upside potential outweighs downside risk. However, the majority of the upside has already been realized, and risks have increased.
All factors considered, Green Mountain is a cautious OUTPERFORM.
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All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions.