439,000 More Reasons for Starbucks to Worry

If your local barista isn't feeling Green Mountain Coffee Roasters' (Nasdaq: GMCR) KO punch, maybe the K-Cup punch will do.

The company behind the single-cup Keurig brewers posted another caffeinated quarter last night. Revenue soared 61% to $190.5 million during the java junkie's fiscal third quarter. Earnings bounded 123% to $14.1 million, or $0.36 a share.

Green Mountain moved 439,000 Keurig brewers during the past three months, along with 398 million K-Cup portion packs, which deliver premium coffee, tea, and hot cocoa for a fraction of what the hipster coffee houses charge.

The market wasn't particularly warm to the numbers, sending shares sharply lower this morning, but shares have since bounced around positive and negative territory.

It was a great report, but far from a perfect one:

• 398 million K-Cups is a humongous number, but it's a sequential decline from the 432 million K-Cups shipped during this fiscal year's second quarter, even though there's a larger base of brewers. Wal-Mart Stores (NYSE: WMT) began stocking entry-level Keurig brewers and K-Cups during the quarter. Shouldn't this K-Cup figure go up? Coffee isn't as seasonal a beverage as you may think.
• Revenue also took a small sequential dip. Starbucks (Nasdaq: SBUX) and Peet's (Nasdaq: PEET) -- two of the premium chains that Green Mountain is presumably eating into -- actually posted sequential revenue gains.
• Accounts receivable rose 82%, and inventory levels climbed 64%. These items aren't overly problematic, given the 61% spike in revenue, but they did outpace the top-line growth.

Despite the warts, the market has this report all wrong. Investors will ultimately follow the earnings growth, and the news was inspiring on that front.

Green Mountain is raising its guidance for fiscal 2009. It now sees a profit of $1.10-$1.14 a share -- up from a prior range of $0.98-$1.02. That excludes a $0.27-a-share pre-tax gain on a patent litigation settlement with Kraft Foods (NYSE: KFT).

The K-Cup kicker is also initiating its guidance for fiscal 2010, which is now just two months away. Green Mountain sees revenue climbing 45%-50% higher next year. Earnings will grow even faster, projected to clock in between $1.70 and $1.80 a share. Now analysts have some serious revisions to do. They were banking on a profit of just $1.47 a share on 30% top-line growth.

Is Green Mountain's stock overvalued? The fiscal 2010 multiple isn't for the squeamish, with the coffee crafter fetching 37 to 39 times next year's projected profitability (based on last night's close). Those are lofty heights, but Green Mountain is growing even faster than that.

There are also more growth catalysts on the way. Conair's Cuisinart and Jarden's (NYSE: JAH) Mr. Coffee will begin marketing single-cup brewers that require Green Mountain's K-Cup refills. This suits Green Mountain just fine because it sells its brewers at cost, in the coffee-bean realm's version of the razor-and-blades model.

Pushing the hardware through licensed third parties will also help net margins, now at a modest 7.4% but growing. As high-margin K-Cups become the real driver, the only regret from those bailing on the stock today will be that they were too caffeinated to appreciate the long-term levitating powers of the company's robust guidance.