Green Mountain is bigger now. Net sales soared 127% higher in its latest
quarter, and earnings grew even faster! It's not all organic. There have
been K-Cup makers and regional java heavies acquired along the way, but who
would argue that this market isn't as big as the market believes it to be?
Green Mountain estimates that there's now a Keurig in 8% to 10% of the homes
in this country. We're not talking SodaStream's (Nasdaq: SODA ) 20% market
penetration in Sweden, but this is a big number in a big country that
drinks a lot of coffee.
It gets better.
In its latest conference call, Green Mountain estimates that 25% of the
coffeemakers sold in this country were K-Cup brewers. In other words, Green
Mountain will continue to gobble up more than 10% of the home market as
older coffee machines break down or simply get replaced.
It gets better.
Green Mountain's java brewer sales are growing considerably faster than the
other 75%, so it would be premature to even call 25% the ceiling here.
It gets better.
Just last week, Jarden's (NYSE: JAH ) Mr. Coffee announced that it was
expanding its line of coffeemakers with licensed Keurig-brewed technology.
Patents and profits
How many stocks do you know whose earnings estimates have been climbing in
recent months? Three months ago, analysts figured that Green Mountain would
earn $1.48 a share this year and $2.14 a share come 2012. Now those same
pros see a profit of $1.65 a share in the fiscal 2011 that ended last month
and $2.61 a share in the fiscal year that just began.
Few will argue that Green Mountain is a bargain at 32 times forward earnings
, but is it so outlandish when we're talking about a company projected to
grow organic revenue and profitability at a roughly 60% clip?
Before you answer, consider that Green Mountain has beaten analyst quarterly
estimates by 10% to 36% over the past year. In other words, the eventual
earnings should be higher -- and the projected P/E lower -- than what we're
seeing now.
What about fiscal 2013? Isn't that the year where this will all fall apart
according to patent expirations in 2012? Tell that to the analysts, who are
expecting earnings to climb 47% to $3.87 a share.
It's true that the two patents protecting K-Cup portion packs in this
country are set to expire next year, putting an end to a need to pay Green
Mountain a few cents for every licensed K-Cup sold. Let's go over a few
points that bears aren't addressing:
•No licensing fees would translate into cheaper K-Cups, which in turn
would grow demand for Keurig brewers that are patent- and brand-protected.
•Green Mountain hasn't historically approached brewers as a profit
center, but it will if it can't cash in on the K-Cup end.
•All of the financials-blurring acquisitions over the years have been
done in anticipation of this very event. From Diedrich to Timothy's to Van
Houtte, Green Mountain already owns its best-selling K-Cup providers. In
other words, it's the biggest beneficiary -- in a roundabout way -- of the
patent expiration.
This doesn't even end there, though. Green Mountain is working on a new
espresso-based system and it's also developing a new Keurig-filtered
platform that may present new and extended patent protections.
Stealing a page out of the Coca-Cola (NYSE: KO ) playbook, Green Mountain
is also exploring K-Cup beverages with functional and wellness benefits. Did
you think that its Swiss Miss deal with ConAgra (NYSE: CAG
