A few days ago, I received the following email from Sean, who likes Green Mountain Coffee Roasters as a possible investment. He wants to know, how does GMCR fit in with what you learned in Rule #1 and Payback Time? Read his note below, followed by my comments at the end of the post.
Hi Phil,
I just finished reading Payback Time! Thanks for all that you are doing to help the little guy take back control. After reading both of your books I feel a sense of financial freedom and control over my retirement.
I was hoping to get your thoughts on Green Mountain Coffee Rosters (GMCR). This stock has been on an absolute roll over the last several years. It has gained over 200% in the past 52 weeks alone!
I have been doing some research on the company and feel like it is a great company with great prospects for continued growth. I think that the company is doing a great job of differentiating itself from other coffee companies by focusing on the in-home market. With the recession hitting the pocketbooks of many families, I think a lot of people are looking to tighten their spending, but if they are like me, they still enjoy a good cup of coffee in the morning to get them going. Instead of purchasing a $6 cup of Joe at a Starbucks, they can a get a great tasting cup of coffee for a fraction of the price using one of GMCR's single serving brewers. I live in Europe at the moment and these in-house coffee brewers are huge. I really think that they will continue to increase in popularity in the US as well.
Additionally, GMCR is continually recognized as a great corporate citizen. They only purchase coffee beans from Fair Trade Certified vendors and they give back 5% of their profits to local communities! The Chairman, Robert Stiller is the founder of the company and the CEO, Larry Blanford is known for his efforts building companies upon the principles of high ethics and corporate sustainability!
The question I have is that while GMCR's growth over the last 10 years has been phenomenal with a 10yr EPS growth rate of 34% up to a current EPS growth rate of over 132%, at what point should we be cautious about getting into this stock? A lot of the speculation on this stock is negative stating that it has really reached its peak, and while I do believe that the current growth rates are unsustainable, I believe that 30-35% is more than achievable for the next 10 years. This, along with a conservative future PE of 28 and a MARR of 15% would still put the sticker at 181 and it is currently selling for 93!
What are your thoughts on getting in on a high-growth business that has demonstrated amazing returns like GMCR with the expectation that growth can not be sustained at the current rates?
Thanks a million! (Soon anyway)
Sean
What I said:
Here's some homework: if we think it will grow at 36%, it will have to double in size every 2 years. How big in 10? Rev and earnings. How does that compare to something else. Optimism is the enemy of great investing.
Now go play.
