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Green Mountain Coffee Roasters Inc. (GMCR): Grab This Opportunity

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The fact that Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) could not meet analyst expectations on revenue in the recently reported third quarter hasn’t gone down well with investors. This completely overshadowed the significant earnings beat and positive takeaways like decent growth in the U.S. business, opportunity in new segments, and more importantly, the solid strength of the 36 excellent brands that have tied up with the company. The current weakness in stock price is creating a good buying opportunity for investors who want to be a part of Green Mountain’s growth story.

Quick look at the quarter
The company reported net income of $116.3 million, up from $73.3 million last year. Adjusted earnings worked out to $0.82 per share, ahead of analysts’ expectations of $0.77. However, revenue increased 11% to $967.1 million, missing consensus estimates of $981.1 million. Sales in the U.S. were up 14%, but sales in Canada declined 3%.

Green Mountain Coffee Roasters Inc. (GMCR)Sales should improve
The weakness in revenue was on account of the 3% dip in Canadian sales. Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) provided plenty of explanation in its conference call for this, ranging from inventory adjustments at stockists to one-time competitor activity. But, the most reassuring fact was that the company has positively adjusted its revenue guidance. Where it was earlier expecting 11% to 14% revenue growth in the current fiscal, it is now expecting 13% to 14% growth.

Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) is banking on 11% to 15% sales growth in the fourth quarter, which translates into revenue of approximately $1.05 billion to $1.09 billion. On its earnings call, the company dropped a hint that it has received a big order and hence, its volume growth in portion packs in the fourth quarter would exceed the 21% that we saw in the third quarter.

In the U.S., which accounts for 85% of Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR)’s business, the trends are quite positive. The company estimates that the size of its installed base would reach 16 million by fiscal year-end. This would be a 36% improvement over last year.

The fact that the Keurig machines are extremely popular is quite well-established. Even Starbucks Corporation (NASDAQ:SBUX)’ Verismo brewers could not dent the popularity of the Keurig. With the increase in the installed base, the sale of portion packs will continue to climb.

Power brands
When K-cup patents expired last year, there was a huge risk of low-end single serve packs flooding the market and eroding Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR)’s business. But, the company has been able to hold on to its ground firmly. A big reason has been the strategic partnerships that it has entered into with lots of beverage makers for selling single serve packs for their brands. Green Mountain has around 36 brands in its system at present.

To thwart competition, Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) has announced that it can take on more partners. In the past, the company had to refuse some alliances as capacity was a constraint, but that is no longer the case. According to analysts at Roth Capital Partners, private label brands are unlikely to capture more than 10%-15% of the single serve market.

Both Starbucks Corporation (NASDAQ:SBUX) and Dunkin’ Donuts, the flagship chain of Dunkin Brands Group Inc (NASDAQ:DNKN)‘, have endorsed their support for K-cups by extending their deals with Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR). In May, Starbucks extended its deal by a minimum of five years, while Dunkin has just announced that its partnership will extend till 2016.

Starbucks Corporation (NASDAQ:SBUX) shipped its 1 billionth K-cup in the recent third quarter. K-Cups added $29 million in sales over the year-ago quarter and fueled 6% growth in the CPG segment.

Overall, the company generated 9% comparative sales growth in the U.S. and increased its total revenue 13% to $3.7 billion. Starbucks Corporation (NASDAQ:SBUX) will continue to see growth from more food and beverage offerings and added attractions like wireless mobile recharging in its stores. International expansion, particularly in Asia, further add to its potential.

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