K-Cup Price War Overstated, Green Mountain (GMCR) Still in Control - Analyst

October 22, 2012 12:10 PM EDT
Get Alerts GMCR Hot Sheet
Price: $91.67 --0%

Rating Summary:
    6 Buy, 18 Hold, 3 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 35 | Down: 31 | New: 10
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To say that shares of Green Mountain Coffee Roasters (NASDAQ: GMCR) has been brutalized over past year may be an understatement. The fact is shares are down 74 percent since hedge fund heavyweight David Einhorn made his bearish case on the stock last October at the Value Investing Congres. But all is not lost, according to analysts at KeyBanc.

The firm doesn't believe the hype that a K-Cup price war is brewing and said the company is positioned to lead the rapid growth of the U.S. single-serve coffee market and is in the early stages of penetrating the broader non-carbonated beverage market.

While the firm has a long-term positive on the stock, they say near term it is a "show me" story. "GMCR needs to prove that its FY13 (September fiscal year-end) guidance is achievable in light of the increased competitive threat following the expiration of two key patents last month," analyst Akshay Jagdale said. He said the market is pricing in "a high probability of a significant downward revision in GMCR's FY13 guidance owing to significant share loss and pricing pressure following the aforementioned patent expirations."

The firm's research continues to point to less than 1 billion in non-licensed K-cup packaging installed capacity, less than market the market expects. In addition, many new entrants are having issues with their throughput levels on newly purchased equipment. This has caused a number of large retailers to "re bid" their private label contracts in recent weeks, the analyst notes. Jagdale said he has reason to believe some large retailers have opted to go with Green Mountain on their private label business as they believe they is the only company that can deliver on the quality and value proposition that consumers have come to expect.

"Considering all of the aforementioned factors, we believe it is unlikely that a K-cup price war will take place anytime soon and as such believe that GMCR will likely meet or beat its FY13 guidance," he said.

The firm reiterated a Buy rating and price target of $36.00.

Green Mountain is set to report fourth quarter results on Tuesday, November 27, 2012 after the market close.

For an analyst ratings summary and ratings history on Green Mountain Coffee Roasters click here. For more ratings news on Green Mountain Coffee Roasters click here.

Shares of Green Mountain Coffee Roasters are up 1% mid-day Monday to $24.17.

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