Green Mountain's roller coaster ride continues
Shares of the coffee company rebound after Wednesday's pummeling.
Shares of the coffee specialty company have rebounded more than 26% Thursday following Wednesday's rout after Green Mountain slashed its earnings outlook. Maybe investors were reacting to the Waterbury, Vermont-based company's announcement that it will buy back as much as $500 million in stock. Perhaps short sellers threw in the towel after Green Mountain reported better-than-expected quarterly results. With cult stocks such as Green Mountain, your guess is as good as mine.
One thing is for sure: The company continues to post remarkably strong numbers in the wake of a faltering economic recovery. Net income rose 30% in the last quarter to $73.3 million, or 46 cents a share, versus $56.3 million, or 37 cents a share, a year earlier. Excluding one-time items, profit was 52 cents. Revenue surged 21% to $869.2 million as consumers took a shine to the company's Vue espresso and latte machines that were introduced earlier this year. There were, however, some worrisome trends.
Gross margin declined to 34.9% from 36.8% as K-Cup demand slumped and production levels were lower than expected. Competition also is rising. Starbucks (SBUX) is planning to introduce its own single-serve coffee brewing machines during the holiday season. Companies including Kroger (KR) and Safeway (SFY) are planning to introduce private label K-Cups as the patent is set to expire.
Furthermore, expenses are surging. Costs for coffee alone hit $153 million, up 116% from a year earlier, and prices for the commodity are expected to continue to rise. Green Mountain spent $90 million on packaging and raw materials, a 95% increase. Inventory soared 60% to $667 million. With figures like those, short sellers such as David Einhorn are not going to ease up their pressure on the company.
CNBC's Herb Greenberg, a longtime Green Mountain critic, recently argued that the days of Green Mountain's hyper-growth are "officially over." CEO Larry Blanford admitted this as well. But even a diminished Green Mountain is pretty strong. Fourth-quarter sales are forecast at $889.9 million to $925.5 million, an increase of as much as 30%. Sales for the 2012 fiscal year are expected to soar 43% to 45% to $3.79 billion to $3.84 billion, before moderating to 15% to 20% growth the following year.
Wall Street continues to expect great things from Green Mountain. The average 52-week price target is $50.56, more than double where it currently trades. There are, however, many reasons why investors should continue to avoid the stock.
First, there is the issue of management credibility. The company has slashed its earnings outlook twice since May. In 2010, Green Mountain did a massive earnings restatement after disclosing an SEC investigation, which appears to be still active. Earlier this year, Green Mountain founder Robert P. Stiller was removed as chairman "after he improperly sold shares to meet a margin call after using his stake in the company to back personal loans," according to Bloomberg News.
The one silver lining in Green Mountain's struggles is that consumers may be able to pick up their favorite K-Cup flavors at lower prices.
Jonathan Berr can't start the day without a cup of Donut House coffee. He does not own shares of the listed stocks. Follow him on Twitter@jdberr.
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