Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) is expected to deliver strong revenue and earnings growth for several years, according to analysts at Cannacord Genuity, due to the increasing penetration of its Keurig coffee makers among households in North America.
Cannacord Genuity analysts, Scott Van Winkle and Mark Sigal noted that Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR)’s second quarter financial performance is 25 percent higher than their expectations as well as consensus EPS estimates on in-line sales and substantial expansion on its gross margin, which drove the surprise and guidance up.
The company’s second quarter gross margin increased by 595 basis points to 41.3 percent compared with the 36.4 percent estimates. Its K-cup shipments increased by 26 percent while its sales climbed by 21 percent to $794 million. Its revenue rose by 14 percent to $1 billion.
Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) also announced its five-year extended and broadened agreement with Starbucks Corporation (NASDAQ:SBUX) that validates its strategy, expands offerings and provides international opportunity.
In a note to investors, Winkle and Sigal wrote, “The story is all gross margin and Starbucks today. The gross margin was so strong that it overshadows a revenue guidance reduction and a lower K-cup shipment result than we anticipated. The gross margin was so strong that it is essentially the sole driver of an EPS guidance raise and our estimate increases.”
The analysts also emphasized that the strength of Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR)’s gross margin confirmed that the concerns regarding competition, which is a key factor in driving prices lower were “simply overdone.”
Winkle and Sigal believe that the company’s gross margin will remain strong and they are certain that it would strengthen in the near-term saying that the bull market for green coffee is fully over, and the prices are back towards historical prices, and still trending softer. They also said that manufacturing efficiency, improved execution, and inventory contributed to the positive performance of Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR).
According to the analysts, the current business model of the company is more efficient than a year ago. They noted that Green Mountain Coffee Roasters Inc (NASDAQ:GMCR)’s free cash flow is increasing, neb debt is vanishing, and a new strategy to integrate the K-cup and Vue cap platforms could solve its CAPX dilemma. The analysts said that the challenge for the company is to identify the current household penetration along with usage to determine forward K-cup forecasts that would drive revenue growth as brewer shipments settled in the range of 9 million to 10 million per year.
The analysts emphasized that Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR)’s agreement with Starbucks Corporation (NASDAQ:SBUX) offers a first truly international opportunity and it could provide incremental sales and profit for both companies.
Winkle and Sigal raised their fiscal 2012 EPS estimates for Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) to $3.15 from $2.80. The analysts reiterated their buy rating with a $73 price target, up from their previous $65 price target.