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Best in Class: Green Mountain Coffee Roasters

Green Mountain Coffee Roasters is still growing quickly as consumers have latched on to its quick brews.
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BOSTON (TheStreet) -- Green Mountain Coffee Roasters (GMCR) was the small-cap stock pick of the Great Recession.

It has returned 63%, annualized, since 2007, outperforming stock-market indices by a wide margin. Meteoric expansion powered the shares. During the past three years, when the economy contracted, Green Mountain increased sales 56% a year, on average, and net income 74% a year. A recession-tuned strategy endeared the Waterbury, Vt.-based company to Wall Street in 2008, but it has continued to surprise analysts and investors during the economic recovery with its aggressive growth tactics.

Green Mountain sells specialty coffee under a variety of brands, including Newman's Own, Tully's, Caribou and Timothy's. It distributes whole beans and ground coffee to supermarkets, convenience stores and restaurants, but its fastest-growing product category is the K-Cup, a single-serving designed for Keurig brewers. Keurig is a wholly owned subsidiary, purchased in 2006. Its brewers are suitable for homes and offices. They gained sales momentum amid the recession as consumers traded down from


(SBUX) - Get Starbucks Corporation Report

to office coffee in order to save money.

Keurig brewers are ideal for the workplace. Since K-Cups are single-serving packets, there is no need to brew an entire pot of coffee. Also, individuals, with presumably different flavor preferences, can insert the K-Cup flavor of their choice without concern for others' preferences. This system is superior to conventional office brewing, and the brewers' ease of use has garnered loyalty. Green Mountain uses a classic subscription model. By selling a custom brewer that can only use K-Cups, it locks in guaranteed repeat business for the life of the machine.

This model, coupled with consumers' ongoing aversion to spending, has kept Green Mountain thriving in the recovery, to the dismay of premium cafes. Green Mountain, unwilling to refer to its Keurig and K-Cup system as instant coffee, has redefined consumers' attitudes toward "quick-brew" coffee. Starbucks, noticing the company's success and struggling with overexpansion, introduced Via, an instant coffee mix, to capitalize on the trend. It has enjoyed success so far, reaching 37,000 points of distribution in the latest reporting period.

As an investment, Green Mountain is superior to Starbucks because of its growth prospects. Fiscal third-quarter net income increased 31% to $19 million, but earnings per share gained just 8% to 13 cents due to a recent three-for-one stock split. Revenue soared 64%. Green Mountain's gross margin widened from 37% to 39% and its operating margin extended from 12% to 14%. Green Mountain completed its acquisition of

Diedrich Coffee

in May. It competed with

Peet's Coffee & Tea


on the deal, but offered superior terms.

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Green Mountain missed analysts' consensus net income forecast because of expenses related to the Diedrich Coffee acquisition and the reversal of a tax benefit recorded in the two previous quarters. Still, non-GAAP net income surged 82% to $14 million. Green Mountain shipped 846,000 Keurig brewers during the quarter, a 91% increase from a year earlier. And more brewers foretells of more K-Cup orders in the coming months. Green Mountain shipped 683 million K-Cups this quarter, a 72% increase from a year earlier.

Growth has been fueled by an expanding debt load. Total debt has more than doubled to $272 million since the year-earlier period. Green Mountain has $9.9 million of cash, also a doubling from a year earlier. Its debt-to-equity ratio of 0.4 is in stable territory. In fact, the proportion of debt-to-equity financing has lessened considerably in the past 12 months, but liquidity could use some improvement. A quick ratio of 0.7 is lower than ideal. Green Mountain's quarterly return on equity declined from 24% to 11% and its return on assets fell from 11% to 6%.

Of analysts following the company, six, or 60%, rate its stock "buy", one rates it "hold" and three rank it "sell." A median target of $35.10 implies 10% of upside. Investor enthusiasm for Green Mountain has pushed its shares to a premium. They sell for a trailing earnings multiple of 60, a forward earnings multiple of 26 and a book value multiple of 6.1, 70%, 73% and 60% premiums to food products peer averages. The stock has climbed 17% in the past month.

Janney Montgomery Scott


Canaccord Genuity

expect another 25% of upside to $40.

The mark of a best-in-class company is a commitment to sustainable business practices. In this regard, Green Mountain is in a league of its own, having been ranked number one on the list of 100 Best Corporate Citizens by Corporate Responsibility Magazine in 2006 and 2007. The company donates at least 5% of pre-tax profit to charitable and environmental causes each year. And it offsets 100% of its direct greenhouse gas emissions. Green Mountain's commitment to its principles has enriched shareholders, generated patron loyalty and inspired other businesses.

-- Reported by Jake Lynch in Boston.


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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.