Swing Trading Strategies & Stock Picks Since 2003

"Comments and a large buy from hedge fund manager Steve Mandal of Lone Pine Capital prompted us to take a new look at Green Mountain Coffee Roasters (NASDAQ: GMCR), and we like what we see," says Geoffrey Seiler.

In BullMarket.com, he adds, "While best suited for more aggressive, growth investors, we're going to step up and add Green Mountain to our buy list."

"Green Mountain is a socio-eco-friendly regional coffee roaster with a stated policy of always donating 5% of pre-tax profits to charity.

"More importantly for investors is that it is the maker of the Keurig one-cup coffee making system. The company sells the brewing systems from around $90 for its base model to as high as $250 for more elaborate models.

"The real money for the company, though, comes from selling K-Cup coffee pods for the Keurig. The company sells over 200 varieties of coffee, tea, and cocoa in K-Cups produced by a variety of roasters. Keurig earns royalty income from K-Cups shipped by its licensed roasters.

"In addition to the home market, the Keurig unit sells machines geared for use in offices, vending areas, and hotels. Those machines sell at prices ranging from $250 to $800.

"The appeal of Keurig’s single-cup systems is that they brew a cup of coffee in less than one minute. All consumers need to do is insert a K-cup and push the start button. T

"he machine automatically controls the temperature, water pressure, and quantity, and is designed to produce a coffee that rivals one from a Starbucks or similar purveyor.

"The company scored a major coup earlier this year when it signed a distribution deal with Wal-Mart in April. Wal-Mart said it would sell Keurig's Elite coffee maker, which has a suggested retail of around $100, and the company's K-Cup portion packs in over 3,000 Wal-Mart stores.

"The company is also penetrating the grocery store market, where about 75% of bulk coffee is sold. K-Cups are now sold in about 8,500 supermarkets, including Safeway, Kroger, Albertson’s, and Jewel. The K-cup has also fully penetrated in the big three warehouse clubs (Costco, Sam's and BJ's).

"Green Mountain has started to scoop up some of the companies with K-cup licenses. Earlier this month, the company announced it was acquiring the wholesale business and Canadian roasting facility of its licensee Timothy's Coffees from private equity firm Sun Capital Partners for $157 million in cash.

"Timothy’s accounts for about 13-15% of system-wide K-cups sales, and gives Green Mountain a presence in the Canadian market. In March, it acquired the wholesale business of another K-cup licensee, Tully's, which is focused on the West coast.

"Meanwhile, in 2010, Green Mountain will be launching co-branded brewers with Cuisinart in the first half of the year and with Mr. Coffee in the second half. The former will appeal to the higher-end crowd, while Mr. Coffee is a top brand in the mass market.

"Looking at valuation, Green Mountain trades at about 25x fiscal year 2011 earnings ending in September 2011 and has near $5 in net cash and short-term investments on its balance sheet.

"he company is expected to grow its bottom line at an annual rate of approximately 30+% over the next 5 years. It's not out of the question that Green Mountain could grow its earnings to over $7 a share over the next 5 years.

"The stock has had a tremendous run this year and isn't in the bargain bin, but it's not overly pricey either given its growth prospects. While best suited for more aggressive, growth investors, we're going to step up and add Green Mountain to the Recommended List.

"Meanwhile, Green Mountain has just swept in with an offer for K-cup licensee Diedrich Coffee, which had previously agreed to be acquired by Peet’s Coffee & Tea.

"reen Mountain going after Diedrich makes a lot of sense. Diedrich accounts for about 10-12% of the total K-cup volume through its Gloria Jeans and Coffee People brands, and Green Mountain would love to continue to consolidate its licensees to have greater control of the K-cup channel. 

"This is an interesting battle that is brewing over Diedrich, and we'd like to see Green Mountain come out on top. However, even without Diedrich, Green Mountain is still in the driver seat with a long, clear pathway to growth in front of it. We rate the stock a 'Buy' with an $82 price target."