Green Mountain Coffee (Nasdaq:GMCR) Riding the Trend

One gets a little concerned when you hear comments about a company like Canaccord Genuity on Green Mountain Coffee (Nasdaq:GMCR), when they said things EPS guidance mean little because of the trend Green Mountain is riding.

Canaccord said, "Green Mountain reported a significantly stronger fourth quarter with robust top-line trends and consumer demand. Revenue of $373 million beat Canaccord Genuity Consumer Products Analyst Scott Van Winkle’s $353-million estimate and consensus of $359 million. EPS was $0.22 vs. Van Winkle’s $0.19 estimate and consensus of $0.20, but essentially in line considering a lower-than-expected tax rate. Brewer shipments were up 67% to 1.2 million compared to Van Winkle’s estimate of 1.0 million and 719,000 a year ago. However, investors were disappointed by Green Mountain’s guidance as higher commodity costs trip up broad investor expectation of accretion from a price increase. Revenue guidance for F11 was increased and brewer sales trends are tracking ahead of expectations. As such, lowering the lower end of the EPS guidance range to $1.19- 1.29 (from $1.24-1.29) was an unexpected outcome. A lower-than-expected gross margin is the culprit, and there are really two explanations for this: 1) first, commodity costs are above expectations. While the rally in green coffee isn’t a surprise to anyone, Van Winkle suspects investors thought, as he did, that the price increase would fully offset the higher prices and that by Q2 or Q3, the company’s pricing would actually be margin accretive; 2) Additionally, warranty and sales return expense were higher in Q4, negatively impacting the gross margin 1-2 percentage points, and is assumed to remain this high in guidance. The warranty and return expense isn’t above industry averages, but is above Green Mountain’s historical trend and is undoubtedly a growing pain. Van Winkle notes that shares were very weak on Friday; this action provides an opportunity, in his opinion, as he believes there are numerous catalysts materializing over the coming year to drive the shares higher. In simplest terms, the business is on fire and no matter what the EPS guidance says at this juncture of the company’s growth rate, the key takeaways are that trends are hot and the company is preparing for them to get hotter as indicated by its enormous capital expenditure forecast of $215-260 million, or nearly double the 2010 level. Obviously, the expectations are that tons more K-cup packaging lines will be needed, which implies brewer shipment strength and a strong business outlook."

Green Mountain closed Monday at $31.96, down $1.85, or 5.47 percent. Obviously not everyone joined Canaccord's bandwagon.