Green Mountain Coffee GMCR S
July 29, 2010 - 8:33am EST by
2010 2011
Price: 29.25 EPS $0.75 $1.15
Shares Out. (in M): 140 P/E 39.0x 26.0x
Market Cap (in $M): 4,100 P/FCF NM NM
Net Debt (in $M): 260 EBIT 160 260
TEV ($): 4,360 TEV/EBIT 27.5x 17.0x
Borrow Cost: NA

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Yes, it's that time again-time to short GMCR.  After a lackluster quarter and poor guidance, GMCR has played the same game as last year at this time and "significantly" raised 2011 guidance to redirect investors' attentions.  I think this is the end of the line for them though. 


First, it is important to recognize that there are some headwinds for the company in 2011.  Among them are:


1) More brewers sold by partners, for which GMCR receives no revenues of any kind

2) No more inventory fill from distribution or channel refill from low 2009 levels

3) Coffee prices are high and not built into guidance due to currently locked-in purchases


In addition, by my calculations the guidance for 2011 assumes the following:


7 million brewers sold at $70 ASP for $490m revenues

4.8 billion k-cups sold at .14 each, up from Q3 results of $.136, for $665m revenues

Specialty coffee sales of $830 million, in line with historic k-cup ratio, $830m revenues


The implications of this are as follows:


1) Keurig has only sold 7.3 million brewers in its existence as a company.  The brewer was the gift item of last season, and now there are lots of other fun "toys" and a more stressed consumer.  They have to sell this many in one year, and then guide up, for the stock to "work".


2) The "tie ratio" of k-cup usage per day to brewers took a significant leg down in the quarter, to 1.03 from 1.2.  This has been declining in a monotonic fashion, which makes sense as more of the brewers are gifted and thus not used.  Guidance assumes a rebound of this ratio to 1.25, which seems unlikely.


3) The implied operating margin for coffee sales, assuming brewer sales are done at zero margin, is only 18%, so my prior estimates of 50% ebit margins for the coffee business alone seem very aggressive (though revenues/k-cup need to be increased to account for the vertically integrated model).  Reducing this ultimate margin to 25% implies a best case, full market penetration value of $14.  This ignores that the patent cliff is in 2012 and that Starbucks is introducing a single cup brewing machine later this year.


I think that the upcoming holiday season and 2011 sales will prove to be unachievable and the stock will decline 50% from this level over the next twelve months.


results fall short of expectations
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