Recent Dip in Green Mountain (GMCR) Could Draw Buyout Interest

June 6, 2012 8:50 AM EDT
Green Mountain Coffee Roasters (Nasdaq: GMCR) shares are up fairly well early Wednesday as one news outlet speculates on a potential merger for the single-serve coffee leader.

Following a 71 percent free fall over the last year, Green Mountain stock has come into a valuation that is much more in-line with industry peers. Shares are currently valued at 11.2 times. The company traded for 81.5 times earnings as recent as of last September. The S&P 500 valuation is 12.9 times and Starbucks (Nasdaq: SBUX) is at 30.7 times.

In the last month, Green Mountain has faced its share of woes: founder Robert Siller lost his chairman role due to a stock sale in violation of company policy, director Doug Daft resigned, and Greenlight Capital's David Einhorn put the company through the ringer on a recent call. Einhorn questioned Green Mountain's accounting processes and also claimed the market for single-serve coffee is limited.

Despite the dip and gloomy sales outlook, analysts still see net income growth of 79 percent for 2012, good enough for private-equity firms to take a hard look.

For its fiscal 2012 reporting year, which ends in September, Green Mountain revs should grow 46 percent to $3.9 billion. For a comparison, Bloomberg sees the S&P 500 gaining 5.3 percent over the same period. Net income and profit margins are also expected to rip to $527.8 million and 10.2 percent, respectively.

Green Mountain said n the past there are 12.2 million Keurig machines in the U.S., accounting for about 14 percent of all households. Despite the number, there are still a few drawbacks. Some key K-Cup patents are slated to expire in September, opening the door for increased competition, and negative $143 million of free cash flow in the trailing 12-month time frame may also turn off PE firms.

With an SEC inquiry into its accounts practices currently ongoing, firms might wait until that situation is resolved before going any further. But taking a dip in one of the leaders in the U.S. coffee industry would bode well for a firm looking to sit and hold onto a winner for the next few years.

Shares of Green Mountain are up about 1.3 percent Wednesday morning.

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