Stifel cuts Green Mountain estimates, shares fall
(Reuters) - Stifel Nicolaus cut its earnings estimate for Green Mountain Coffee Roasters Inc (GMCR.O), citing growing competition for single-serve coffee cups for its Keurig machines, and the company's stock fell as much as 10 percent to the lowest level in nearly 3 years.
Stifel's report on Friday came the same week that communications between Green Mountain and the U.S. Securities and Exchange Commission were made public, in which the company downplayed the importance of the increased competition.
Stifel analyst Mark Astrachan reduced his earnings estimate for fiscal 2013 to $1.80 per share from $2.27. He also estimated fiscal 2014 earnings of $1.64 per share.
Analysts on average were expecting earnings per share of $2.37 for the current year, fiscal 2012, and $3.05 for fiscal 3013, according to Thomson Reuters I/B/E/S.
Astrachan predicts growing competition for Green Mountain's proprietary K-Cups for its Keurig brewers, due in part to the expiration of certain patents in September. This will pressure pricing, increase promotions and eat into Green Mountain's market share, reducing its long-term earnings power, he said.
"A few pennies of reduced pricing has a meaningfully negative impact on earnings, assuming no material change in input costs," he wrote in a research note.
Green Mountain sells its Keurig brewers virtually at cost in order to drive consumer adoption. It makes most of its profit from the K-Cup refills.
New, cheaper entrants to the K-Cup market throw the sustainability of Green Mountain's margins into question.
Green Mountain shares fell as much as 10 percent to $19.17, their lowest in 3 years, before trading down $1.55, or 7.3 percent, at $19.72 on Nasdaq.
Before Friday's decline, Green Mountain shares were already down more than 80 percent since September, due to questions about its business model, accounting practices and interest from short-sellers, including Greenlight Capital's David Einhorn, who have bet the shares would fall.
SEC QUESTIONS OUTLOOK
Green Mountain is also facing questions from the SEC.
According to documents made public this week, Green Mountain told the SEC that even though certain of its patents that cover "significant aspects" of its K-Cup packs will expire in September, it does not have any data beyond what was disclosed in its annual report that leads it to conclude that the expirations are likely to have "a material impact" on its financial position, results or liquidity.
"The company believes that it has competitive strengths, aside from its intellectual property portfolio, that enhance its business and mitigate the potential material impact on its financial position and results of operations in the future arising from the patent expirations," the company said in a letter to the SEC dated May 4.
The company said its advantage as the market pioneer gives it efficiencies and scale, while its large portfolio of brands and new Vue brewer decrease the importance of the expiring patents.
Yet on Friday, Astrachan said K-Cup pricing is already decelerating. Citing scanner data from stores, he said there have been declines in markets where Rogers Family, owner of San Francisco Bay OneCups, have achieved the highest market share.
Rogers Family, a privately held California company, is also manufacturing cups for Safeway Inc's (SWY.N) private label single-serve coffee cups without the blessing of Green Mountain.
Astrachan also said there have been heightened K-Cup promotions in other retail channels, including department stores, big box retailers and drug stores and substantially increased availability at discount chains Big Lots (BIG.N) and TJ Maxx (TJX.N).
That could indicate slowing demand and/or an oversupply of K-Cups, Astrachan said.
(Reporting By Martinne Geller in New York; Editing by Gerald E. McCormick and Richard Chang)
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