2. Investment Thesis
GMCR is a market leader in a growing
consumer industry
Great potential for growth and
innovation
Over 30% short interest, allowing for a
potential short squeeze
Worries over competition driving down
margins are overestimated
3. Industry Overview
Coffee consumption is increasing (78%
to 83% in one year) along with single
cup coffee consumption (8% to 13% in
one year)
24% owned a brewer in 2012, 36% in
2013
4. Company Overview
Operates in the US and Canada
GMCR is the leader in single-cup coffee
with 13% market share of total coffee
consumption in the US
Sold 8.3 billion portion packs, compared
to 6.6 billion last year (26% increase)
Strengths in loyalty, diversity, and
brands
5. Business Model
Operates on a razor/razor blade model
Sells brewing machines (razor) at low
margin
Sells K-cups (razor blade) at high margins
22% growth in portion packs
Has wholesale customer accounts in
supermarkets, convenience
stores, hotels, restaurants, universities,
and offices
10. Recent Updates
Announced a $1 billion share buyback
program
Announced $1.00 annual dividend, paid
quarterly
16% revenue growth for year; 22% for
quarter
FCF grew from $77 million last year to
$603 million, projected $200-$300 for
next year
11. Looking Ahead
Upgrading to Keurig 2.0 within a year
Expanding into cold products (carbonated,
sparkling, and still) with new technology
Launching in UK, Australia, South Korea,
and Sweden in 2014
Looking to grow in work (10%), hospitality
(5%), and food (1%) locations
Expanding into soup and hot cereal
Locked in 100% of coffee beans for 2014
13. Risks
Decreased sale of Keurig Brewing
Systems from competition
Shifting preferences for coffee
SEC looking into accounting practices
Increased competition after patent on Kcups expired September 2013
Price of Arabica coffee beans
14. Conclusion
Coffee consumption and single cup
coffee is increasing
Undervalued due to overestimation of
competitors
Float short allows for a potential short
squeeze
Unique company in that it sells both brewers and the coffeeLots of people are shorting, which I’ll get into later, which allows for a possible short squeeze.Lastly, competition is overestimated, which is deflating the stock’s price.
We are headquaretered in Waterbury, Vermont. We were founded in 1981 as a local coffee shop, and then expanded across the US and Canada. We partnered with Keurig in 1998, bought 42% of Keurig in 2002, and acquired the rest in 2006. We operate in both Canada and the United States. We are the leader in single-cup coffee sales. We sold 8.3 billion portion packs this year, compared to 6.6 billion last year. In the fourth quarter portion pack shipments increased by 29%.
In October 2011, David Einhorn, the hedge fund manager of Greenlight Capital, gave a 110-slide presentation that focused on three things: 1. that the market for single-cup coffee was limited, 2. that patent issues will erode the company, and 3. that the company was using illegitimate accounting practices. A few weeks later, the company missed estimates.
The CEO of this company has been Brian Kelley since December 2012. Before that he was the chief product supplier at Coca-Cola, and before that he was the CEO of Sirva Inc., which was formerly known as the North American Van Lines.
Here are some risks we might face. Firstly, there could be a There was concern that competition from other vendors would drive margins down after the patent on K-cups expired in September this year. However, there was a 29% increase in portion pack shipments in the fourth quarter, meaning that sales were not affected in any noticeable way. This shows that we have brand loyalty. Furthermore, we are trying to eliminate this competition risk through the introduction of the Keurig 2.0 which will not work using other portion packs.
