Green Mountain Coffee Roasters, Inc. | Executive Summary
Hada Jang, Shicheng Tang, Iris Yijin Zhang
April 30, 2013
Green Mountain Coffee Roasters, Inc.
Headquartered in Waterbury, Vermont,Green Mountain Coffee Roasters, Inc. is a mid-capcompanyfounded in 1981with $8.49 billion market capitalization. As one of the leading companies in the specialty coffee and coffee marker businesses, Green Mountain Coffee Roasters (GMCR) is rated among the top four best-selling coffeemakers by dollar volume in the United States.
Business Overview
Green Mountain Coffee Roasters, Inc. manages its operations through three operating segments, the Specialty Coffee business unit (“SCBU”), the KEURIG business unit (“KBU”) and the Canadian business unit (“CBU”).SCBU sources, produces and sells coffee, hot cocoa, teas and other beverages, in a variety of packaging formats, to consumers in the United States.KBU targets its premium patented single cup brewing systems for use both at-home (“AH”) and away-from-home (“AFH”), in the United States.CBU sources, produces and sells coffees and teas and other beverages to Canadian consumers.
SWOTAnalysis
The strengths of the company includes that it has leading market position built on its strong product portfolio. The KEURIG unit brings strong revenue growth to the company. And its sustainability initiatives enhanced the corporate image these years. The major weakness is that they rely heavily on a single manufacturer in China for single cup brewers. The company has established a number of strategic agreements in these years which provide them the opportunity to expand their market. And they just announced to enter into the functional drinks market in the US which is another good opportunity. But they also face the intense competition in specialty coffee market. Also, the increased demand for high-quality Arabica coffee beans coupled with possible supply shortages will increase the raw material costs and harm their margins.
Industry Analysis
Coffee market, as its beta shows, is very stable and constantly growing market without cyclicality; at the same time, it is also very competitive market. Moreover, the global coffee market has increased by more than 30% since 2008; the US coffee market and the Asian market have also increased by 58% and 46% during the same period, respectfully. GMCR is a leading company that has built strong product portfolio and its sales and performance have significantly improved over the past years; that has been powered by tremendously increased demand in KEURIG coffee makers and K-Cup pack coffee. GMCR could havemonopolized the market through its K-cup pack patent that is expired on September 2012. Therefore, there is some skepticism how GMCR can secure their market share after the expiration of its patent, but our analysis supports that GMCR will be able to secure its leading position in the market and to achieve solid future earnings.
Recommendation
Even though comparable companies analysis suggests an expected value around
$66 on GMCR and discounted cash flow model also reflects a fair value of $61.06, both of which are above the current price of $56.55, we believe Green Mountain Coffee Roasters, Inc. should be placed on watchlist for further evaluation.
We believe that beta used in finding the discount rate did not fully comprehend the business risk that GMCR is facing in the future because its K-Cup pack patent expired lately in September 2012 and it targetsonly a small proportion of the coffee drinker population in terms of only consumers who prefer one-cup coffees. It is unclear how GMCR will react to these key challenges. Hence we consider the undervalued signals from both comparable companies analysis and discounted cash flow model to be too weak to support the suggested 17.54x forward price multiple on earnings or to conclude on any buy action. We recommend future interested researchers to carefully monitor management’s strategies and actions and re-evaluate Green Mountain Coffee Roasters, Inc.