The Exchange

Green Mountain Shares Stumble Ahead of Earnings

As Starbucks shares (SBUX) continue to add to steep losses following their earnings miss last week, investors are looking toward another coffee giant's earnings on Wednesday. Green Mountain (GMCR), the leader in the single-cup space with its Keurig brewer, will report 3Q results after the bell. A weak report could further hit its volatile stock, which has seen a massive 82% decline since this time last year and is down around 60% year-to-date.

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Estimates for earnings per share are, on the low end, 0.43 percent, and at a high of 0.53, according to Yahoo! Finance data. Revenue is estimated to be $910.07 million on the high end at $852.45 million on the low. This would mark an estimated sales growth of around 21%.

Obviously it's been a tough trek for this Mountain over the past year; just a look at the stock's 52-week range, with a low of $17.11 and high of $115.98, tells that story. The strong selloff began in earnest last October, when hedge fund manager and vocal GMCR short David Einhorn gave a presentation that sharply criticized the company's business model, transparency and accounting. Shares were trading at $82 on that day.

Following the company's last earnings report in May, Green Mountain lost close to 50 percent of its market cap in one dizzying session after the company cut its forecast for the year amid slowing demand for its K-Cup coffee refills.  As reported that day, CEO Larry Blanford seemed to be struggling himself to understand the reasons behind the sales slump, citing possibilities ranging from the unseasonably warm weather to shifts in purchasing patterns. This seeming lack of concrete understanding of how its business actually works has been a further concern for investors; uncertainty can often breed contempt on Wall Street.

Many Challenges

Slumping sales mark just one of the challenges Green Mountain has faced this year; increasing competition to its massive 71% share of the K-cup space is another.  Back in early March, shares saw another rough day after Starbucks announced it would enter the single-serve market with its own brewing machine, Verismo, which is due out at the end of this year. This challenge spooked GMCR investors, even though Starbucks stressed that its deal with Green Mountain to sell K-Cups would continue and called its partnership "solid." Green Mountain ended down $10 that day, just as Starbucks hit an all time high of $50 (on a split-adjusted basis).

Along with Starbucks, Keurig brews single cups from brands including Dunkin', Tully's, Celestial Seasonings, Newman's Own, Wolfgang Puck and the Donut House Collection. It also earlier this month unveiled its first iced fruit drink, Vitamin Burst, at the same time that Starbucks debuted its Refreshers line of fruity beverages.

Green Mountain is also facing recent exec shakeups, which adds more uncertainty to investor malaise. Back in May founder Robert Stiller was removed as Chairman of the Board following a company-prohibited sale of $125.5 million in Green Mountain stock to meet a margin call on loans. (Populist rage alert: Stiller admitted that part of this loan was used to purchase a luxury yacht.) CEO Blanford has also announced his intention to retire at the end of 2013.

Looming Expirations

Perhaps most ominously, Green Mountain is looking at an expiration of two key K-cup patents in September, which could be a boon to competitors -- including major supermarkets Kroger (KR) and Safeway (SWY) -- set to offer lower prices or manufacture their own portion packs.  These looming expirations led to an SEC inquiry this spring, as regulators probed for details on the possible impact to Green Mountain's business. The inquiry closed in early June; a 2010 probe into its accounting practices -- roundly criticized by Einhorn -- remains open.

Regarding the challenges posed by September's patent expirations, Green Mountain spokesperson Suzanne DuLong says, "We have long been prepared for the potential for private label participants in this growing category, and we remain very confident in our ability to continue to grow our business in a more competitive environment, should that occur."

Green Mountain's stock did see a 20% rise over two weeks earlier this summer that analysts struggled to explain, as there was no real catalyst to the snapping up of shares. GMCR shares have a short interest of about 20 percent, and some analysts at that time suggested the bump may have been due to short-covering.

But that small rise came crashing down on July 13, when Stifel Nicolaus analyst Mark Astrachan cut the fiscal 2013 earnings estimate for Green Mountain to $1.80 per share, down from $2.27,  a 20 percent difference. According to Thomson Reuters, analysts at that time were expecting average earnings of $3.05 per share for the fiscal year. Astrachan also put the price target of the stock at $14, which is $4 and change below where shares are trading Tuesday afternoon.

"Green Mountain's wholly-owned brands have lost meaningful share of system-wide KCups since the introduction of partner brands in September 2010 and we anticipate this will continue," Astrachan wrote in the note. "Pricing has decelerated in recent months and we anticipate it will worsen due mainly to increased competition stemming from the September 2012 patent loss and to a lesser extent lower coffee prices."

In an email, Astrachan reiterated his stance ahead of Wednesday's report, saying, "There's no change to our thesis."

As of press time, calls to other analysts who cover Green Mountain had not been returned.

Still Growing

That said, despite all the challenges, the company does continue to grow: K-cup sales, although slowed, still rose 47% in 2Q, and, year-over-year, its revenue -- while missing expectations --  was still up 36 percent. Does the stock's horrible performance, then, really match the true numbers? With its lower P/E ratio of 8.5, is it a buy? (For a point of comparison, Starbucks has a P/E ratio of 25, Dunkin Donuts 70.3 and Peet's 64.6, according to Y! Finance data). Or does the lower P/E ratio indicate it will remain a dud in the near -- or far -- future? This remains to be seen, but the ride continues to be a compelling one.

Tune in after the bell on Wednesday for the latest results, with conference call to follow at 5:00 p.m. Eastern.

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