Pat McKeough responds to many personal questions on potential stock picks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for the Inner Circle.
This week, an Inner Circle member asked about a stock that practices a form of socially responsible investing. This coffee maker emphasizes fair trade principles in its business dealings—and Pat assesses just how well the company is doing under those conditions.
Q: Pat: Thank you for all the great advice. I’d appreciate your opinion on Green Mountain Coffee Roasters. Thank you.
A: Green Mountain Coffee Roasters Inc. (symbol GMCR on Nasdaq; www.gmcr.com) is a leading maker of specialty coffees.
Vermont-based Green Mountain roasts about 100 varieties of coffee, which it sells to wholesale customers such as supermarkets, convenience stores, resorts and coffee-delivery services. The company also sells its coffees and related accessories online.
Green Mountain sets itself apart from the competition by emphasizing fair trade and organic products. About 24% of its coffee comes from fair trade sources.
Fair trade goods are certified as meeting certain principles, such as the payment of reasonable prices, safe working conditions and economic sustainability. Green Mountain, for example, pays a minimum price—which is often higher than market rates—for its fair trade-certified coffee beans to help improve coffee farmers’ living standards. The company also gives at least 5% of its annual pre-tax profits to what it sees as socially responsible initiatives.
In June 2006, Green Mountain paid $160 million for Keurig, one of the leading makers of single-cup home and office brewing systems. Keurig gives Green Mountain another channel for selling its coffee because the company’s machines only work with patented “K-Cups,” which are plastic cups filled with coffee and sealed with a foil top. The Keurig machine pierces the foil and brews a fresh single cup. It also makes tea and hot cocoa.
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New premium brewing system lets coffee drinkers control size, strength and temperature
Green Mountain lets other companies, like Starbucks and Dunkin’ Donuts, sell K-Cup coffee packs through licensing deals. Sales of K-Cups and Keurig brewing machines now account for over 85% of the company’s overall revenue. The remaining 15% mainly comes from bulk coffee sales.
In February 2012, Green Mountain launched a new premium brewing system called Vue, which lets users control the temperature, strength and size of their beverages.
In Green Mountain’s fiscal 2012 third quarter, which ended June 23, 2012, its sales rose 21.2%, to $869.2 million from $717.2 million a year earlier. The new Vue system contributed $20 million to the company’s sales in the latest quarter. Green Mountain also raised its prices to offset higher raw-material costs.
Excluding one-time items, earnings rose 9.5%, to $82.9 million from $75.7 million. However, earnings per share rose only 6.1%, to $0.52 from $0.49, on more shares outstanding.
In the most recent Inner Circle Q&A, Pat examines whether Green Mountain’s wholesale business can offset rising competition from larger companies like Kraft and Nestle that have launched their own single-serve coffee makers. He also assesses the major risk the company faces when the patent on its K-Cups expires this month. He concludes with his clear buy-hold-sell advice on this stock.
COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members
Have you ever invested in a stock primarily because it claimed to follow socially responsible principles? Would you advise other investors to do the same? Let us know what you think in the comments section below. Click here
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