Husky Traders
Stock Pitch: GMCR
Nabil Manji
February 26, 2014
Industry Overview
COFFEE!
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NA/Europe: Coffee = 1/3 of water consumption
2.25b cups consumed per day worldwide
Size:
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~$120b global market
~$15b sold by coffee brewers/retailers
Second most traded commodity behind oil
Sectors:
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Brewers/retailers: SBUX, local coffee shop
At Home: Nestle, Folgers (>60% mkt share)
New “Convenient At Home”: Keurig,
Verisimo, Nespresso, etc.
GMCR Company Overview
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Founded 1981 as producer, distributor, and retailer
of organic, fair trade, and specialty coffees
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Buys from farmers  refines & roasts  sells to
brewers, retail chains, and directly to consumers
In 2006, acquired Keurig
Revolutionized home brewing…
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No messy filters
Variety of choices  pleases all
Convenient & fast
No waste
Easy to clean up (no dishes)
Growth Catalysts
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Starbucks raising prices  $3-5 per drink unsustainable
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Keurig Pods ~$0.25 per drink
Growing health conscience  reversion to drip/black coffee
away from fat, sugary milk-based espresso drinks
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Desired convenience without hindrances
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Easy expansion  no regulatory hurdles
Sincerest form of flattery is when your
competitors copy you…
Starbucks Verismo
Nespresso
Cuisinart
Basic Financials
Metric (FY 2013)
#
Revenue
$4.36 b
Gross Profit
$1.62b (37.16%)
Net Income
$483m (10.05%)
EPS
$3.16 (38.60% growth YoY)
Dividend
$1.00/yr (0.85% yield)
Technicals v. “Competitors”
Company
GMCR
SBUX
DNKN
Sector
P/E
34.86
545.93
37.93
33.70
Price/Sales
3.97
3.48
7.67
5.07
Beta
0.87
1.26
0.45
0.57
Op. Margin %
(5yr avg.)
18.37%
15.01%
32.94%
18.92%
Dividend Yield
0.85
1.47
1.79
2.29
Forecast Sales
Growth
11.30%
10.90%
7.60%
-
Price to Cash
Flow
23.51
67.00
28.00
25.15
Quick Ratio
1.84
0.95
0.90
0.84
Outlook
Strategic:
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Home brewing growing ~5% annually since 2004
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Cost- and health-conscious consumers move away from Starbucksesque drinks
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Keurig has long-term contracts with many producers (Lavazza,
Dunkin, Tully’s, GMC, etc.)
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New partnerships with manufacturers (Cuisinart, etc.)  increase
margins over long-term by focusing on K-pods
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Entry into commercial market  prime for disruption
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Marketing  customer entrenchment
Operational:
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Moving towards asset light structure (outsourcing production to other
manufacturers)
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Rapidly increasing size  more power over suppliers
Risks
 Patents expired last year  easy for competitors to copy
 Dependence on suppliers to maintain variety
 Quality concerns over Keurig machines haven’t been satisfactorily
addressed/corrected
 Big price jump after beating 2013 earnings forecasts; maybe we’re
too late & future is already priced in?
Takeaways
Price/Stock:
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Based on sales/margin growth expectations, a bargain
compared to competitors & industry/sector
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Newly implemented dividend of $1.00/share
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Analyst mean/median target: $125.00 (current price = $116)
My Thesis (risky):
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Keurig entering more retailers, homes, businesses
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Once people own machine  high margin K-cups
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Earnings play (announcing May 5)
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Most Keurigs sold holiday season  many K-cups will
be sold this quarter for new owners