Starbucks Roasted by Green Mountain

As the economy recedes, Americans are cutting back on $5 lattes but still need to satisfy their caffeine addictions. As a result, Green Mountain Coffee Roasters(GMCR Quote) stands to benefit from a trade-down effect as consumers seek cheaper, but flavorful, coffee. The loser? Starbucks(SBUX Quote).

TheStreet.com Ratings expects "buy"-rated Green Mountain to extend its strong performance this year and outperform "hold"-rated Starbucks, in addition to food-products competitors including "sell"-rated Smithfield Foods(SFD Quote), as well as Sanderson Farms(SAFM Quote), Hain Celestial(HAIN Quote) and Del Monte Foods(DLM Quote), all of which are rated "hold."

Green Mountain's fiscal first-quarter results trounced estimates. Revenue jumped 55.8% to $197 million, and net income rose five-fold to $14.38 million. The Waterbury, Vermont-based company has posted year-over-year earnings per share growth for eight consecutive quarters, but the latest increase, from 12 cents per share to 56 cents per share, indicates a dramatic surge in profit. Starbucks, in contrast, reported that revenue in the three months through December fell six percent to $2.6 billion, and net income plunged 69% to $64.3 million.

Green Mountain has not held on to much cash. Its quick ratio fell to 0.79 in the latest quarter, indicating a subpar liquidity position. The debt-to-capital ratio fell to 0.36 from 0.50, demonstrating an improved capital structure. The company recently won a patent-litigation suit against Kraft(KFT Quote) and used a sizable portion of the $17 million settlement to decrease its long-term debt.

Green Mountain purchased Keurig, a maker of instant-coffee brewers, for $104.3 million in 2006. Green Mountain sells the Keurig brewers to homes and offices, and tacks on an initial supply of K-Cups, the single-serving instant-coffee packs. When customers run low on K-Cups, they put in another order. Keurig shipped 357 million K-Cups during the first quarter, a 55% increase from a year earlier. More importantly, Keurig brewer sales more than doubled to 711,000 units. K-Cups are sold at a reasonable markup, whereas the brewers are sold, according to the company, "practically at cost." Consequently, the road ahead should be rife with profits as recent brewer purchasers deplete their initial supply of K-Cups and need to reorder.