Green Mountain, Keurig face beginning of end

The roaster's stock slumps as Starbucks launches a single-serve brewer.

By InvestorPlace Mar 9, 2012 10:34AM
Credit: © 2012 Starbucks Corporation
 
Caption: Verismo® System by Starbucks, A New Premium Single Cup Solution for At-Home Espresso and Coffee BeveragesBy Jeff Reeves

Starbucks (SBUX) is the king of coffee, but for a while, Green Mountain Coffee Roasters (GMCR) was giving it a run for its money. Green Mountain -- with its patented Keurig single-serve coffee maker and K-Cup technology -- allowed easy, high-end coffee brewing at home for a relative bargain.


But Starbucks hasn't taken kindly to the competition. The Seattle company has caught on to the tremendous potential of single-serve brewers and is launching its own machine, called Verismo. That could mean the end of the line for Green Mountain and its very profitable run.


The momentum of GMCR should be well-known by all investors. Green Mountain is up more than 600% since early 2009, compared with 42% for the Dow, due almost wholly to the roaring success of its Keurig and K-Cups.


Consider that revenue was $500 million in 2008 and topped $2.6 billion in 2011. More impressive is that earnings per share went from a measly 19 cents for fiscal 2008 to $1.31 last year.


But momentum stocks like GMCR always follow the same script: massive expansion, soaring stock prices, then a very painful correction when the growth stops.

That correction is what we are witnessing now, with the stock slumping 15% in early trading Friday.


The irony is that Starbucks suffered such a momentum stock letdown a few years ago. It had massive growth fueled by rapid expansion and java junkies eagerly spending more cash on caffeine. Then it overextended by opening too many stores, and growth slowed. Competition cropped up, and consumer tastes changed to favor energy drinks like those produced by Monster Beverage (MNST) and Red Bull. And unfortunately, those trends aligned with the financial crisis and resulting recession, gutting consumer confidence and severely hurting traffic to Starbucks cafes.


SBUX went from $40 per share in 2006 to bottom out at almost $10 less than three years later.


It's not necessarily Green Mountain's fault that the music stopped. It had a great idea and made a great run -- while it lasted. Only the rarest of companies can see breakneck earnings and sales growth like that maintained for a long period, and more often than not, momentum naturally wanes because of circumstances beyond the control of the CEO or company.


But now that investors are skeptical, prompting a major contraction in GMCR prices, it's on Green Mountain to prove that it has a legitimate second act past a high-end replica.


Again, consider Starbucks. Starbucks managed to restore confidence by calling former CEO Howard Schultz out of retirement, streamlining operations, launching its Via instant coffee line and revamping its menu. Eventually some of those investors came back because they thought the company had evolved.


But it took five years and all that work for Starbucks to eclipse its previous 2006 peak.

Green Mountain should take notice. It has to admit that its Keurig business is mature and competition is going to wear away at the bottom line -- then figure out its next move fast.


Otherwise, it's going to be a long few years of steady declines as companies like Starbucks eat its lunch.



Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.





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5Comments
Mar 9, 2012 8:02PM
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Hey I love Starbucks, but why would I purchase a Starbucks single cup maker when i already have a Keurig and there are so many choices of coffees, teas, etc. for the Keurig.
Mar 9, 2012 7:47PM
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Smile I've been trying all kinds of coffee makers/brewers but they are all a bunch of craps. I want a real coffee perculator. No more of those lukewarn bean washer  micky mouse stuff for meThinking.
Mar 9, 2012 8:46PM
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If people were smart, they would get away from DD garbage
Mar 9, 2012 8:29PM
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the more i think about your article is terrible
Mar 9, 2012 8:10PM
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i dont understand your thinking other than you thing gmcr is in troulble but what should the people do with thier keurigs that they love and the variety of k cups? starbucks is poor taste and they have multiple machines for sale. noone has keurig i believe the stk rebound at the lastest when earning show a great quarter. i also would be schocked if green m was purchased by nestle or someone else its cheap considering what they have     k cups are here to stay unless starbucks buys everyones machine

 

your article is very suspect

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