Green Mountain Coffee is up 18,250% in 18 Years. Could This Stock be Next?

Tim Begany's picture

Tuesday, July 19, 2011 - 9:00am

by Tim Begany

I sure wish I'd bought shares of specialty coffee maker Green Mountain Coffee Roasters Inc. (Nasdaq: GMCR) when the company went public back in September 1993. In those 18 years, the stock rose an astounding 18,250%. So even if I'd only bought $2,500 worth of the initial public offering, my investment would now be valued at more than $480,000.

The stock has performed extremely well recently, too, returning almost 170% in 2011 and delivering an average return of 125% annually in the past three years. Despite its amazing run, Green Mountain Coffee is still a "buy" according to many analysts, who estimate the stock still has upside of 25% to 85% in the next three to five years.

I'm skeptical, though. At $111, Green Mountain Coffee's price-to-earnings (P/E) ratio is already more than six times the industry average. The stock also seems far too expensive by several other metrics including the price-to-book (P/B), price-to-sales (P/S) and price-to-cash flow (P/CF) ratios, as the table below illustrates.

Green Mountain Coffee valuation measures

Frankly, valuations like these are way too rich for my blood. So what should I do, just accept that I missed out on a once-in-a-lifetime investment opportunity?

In the case of Green Mountain Coffee, the answer is yes.

However, there's a similar investment opportunity involving a company that has seen its shares soar more than 270% since going public only nine months ago. The company, Israel-based SodaStream International Ltd. (Nasdaq: SODA), is viewed by some analysts as the "next-big-thing" in carbonated drinks, and I think its stock could run up just like Green Mountain Coffee's shares. Recent stock gains have pushed the firm's market capitalization up to $1.4 billion -- just into mid-cap territory.

Sodastream and Green Mountain Coffee are alike in that both make a niche home appliance. Green Mountain's Keurig, a single-serve electric coffee brewer used to complement its specialty coffees, has become wildly popular and has been the primary driver of the company's amazing growth. Sodastream is hoping to capture some of that magic with its countertop soda machines that use water and various syrups to make 12 flavors of carbonated soda. The soda made by the machines is touted as being a healthy alternative to traditional soda, with fewer calories and less sugar. The machines also come with reusable plastic bottles, which Sodastream says are better for the environment and much more economical and convenient than store-bought soda.

First-quarter results attest to SodaStream's growing global popularity (its soda machines debuted in the United Kingdom but are now sold throughout Europe and also in the United States, Australia, New Zealand, Canada and South Africa for between $80 and $200). Revenue, for example, climbed 50% in the first quarter to $64 million and earnings more than doubled to $0.31 per share, $0.16 more than expected. Analysts predict total earnings per share of $1.22 in 2011, 8% more than last year, and $1.62 in 2012, a 33% gain compared with 2011.

Based on these results, management's forecast of 30% sales growth for the next three years seems doable. Indeed, it may prove to be an underestimate, especially if Sodastream partners with Wal-Mart (NYSE: WMT) or Target (NYSE: TGT) -- a strategy that would obviously maximize access to its products, though no such deals have yet been announced. SodaStream is currently available at J.C. Penney, Bed Bath & Beyond, Kohl's, Macy's, Sears and Best Buy.

At about $74 a share, SodaStream is trading at 61 times 2011 earnings and 46 times 2012 earnings. The stock has a PEG (P/E-to-growth) ratio of 1.4, which I calculated by dividing the estimated 2012 price-to-earnings (P/E) ratio of 46 by the forecasted 2012 earnings growth rate of 33% (46/33 = 1.4). A PEG ratio of 1 or less indicates a stock is priced right or is undervalued. A PEG ratio of more than 1 suggests a stock is overpriced -- by 40% in the case of Sodastream.

However, the stock seems more reasonably valued when you compare its price-to-sales (P/S) ratio of 4.9 to that of certain key competitors. Coca-Cola (NYSE: KO), for instance, is trading at 4.1 times sales and Hansen Natural (Nasdaq: HANS ), which makes natural sodas, fruit juices and energy drinks, trades for 5.1 times sales. No, these aren't apples-to-apples comparisons, since Coca-Cola and Hansen Natural don't sell home beverage-making machines. But Sodastream may be a direct threat to those and other beverage makers because its product is a unique alternative.

Action to Take --> Although the days of extreme stock returns could be winding down for Green Mountain Coffee, they may just be starting for Sodastream. Its soda machines could prove revolutionary in the carbonated beverages industry and pull billions of consumer dollars away from Coca-Cola, Pepsico (NYSE: PEP) and other traditional carbonated beverage companies.

The big knock against Sodastream is that it's just a fad and not at all the next Green Mountain Coffee. If you agree, you might consider shorting the stock. If you disagree, keep an eye on the stock, do some more homework and consider buying some shares. You just may be investing in the next big thing.

P.S. -- If you're looking for quality stocks with high yields, you should take a look at this one. It pays a 19.2% dividend yield. It borrows cheap, gets paid handsomely and then pockets the spread. You'll get the full story on this cash machine and others like it in this video.

Tim Begany does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.