Barron's Says Green Mountain (GMCR) Appears Risky

Green Mountain Coffee Roasters' (Nasdaq: GMCR) stock has been very hot the past few months as it has more than doubled to trade above $80 per share. However, Barron's says at almost 60-times FY09 earnings forecast, Green Mountain's valuation needs a closer look.

Barron's questions why March earnings beat analysts' forecasts by 40% when sales beat forecasts by only 8%. It said that an 85% jump in the royalties Green Mountain gets from other companies selling coffee in its K-Cup single-serve pods boosted earnings. But, a significant portion of those royalty generating sales were to Green Mountain itself, which sells both its own coffee pods, and those of other brands. By increasing its wholesale purchases from K-Cup licensees, GMCR can trigger royalty payments that boost its own profits. Green Mountain did in fact triple its March-quarter purchases from the licensee, Diedrich Coffee (Nasdaq: DDRX), generating royalties that were approximately 10% of the $21 million in pre-tax profits.

Green Mountain's self-fulfilling activities aren't exactly clear, because Diedrich is the only K-Cup licensee that publicly reveals its sales to Green Mountain by quarter. GMCR didn't respond to questions about how and if Green Mountain manages its earnings.

Green Mountain can generate profits through its purchases from royalty-paying licensees, but Barron's questions what really is the true profitability of Green Mountain's business.

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