Green Mountain Looks Like a Fading Fad

Were down to the final two weeks of trading in 2011, and Green Mountain Coffee
Roasters (NASDAQ: GMCR ) continues its fall from grace. On Aug. 31, I
recommended investors sell this stock , which at the time was up 200%
year-to-date. My rationale for selling boiled down to the simple fact that Green
Mountains competition was heating up. Since that time, Green Mountain shares
have lost half their value, including a 20% drop through the first three days of
this week. And if anything, the competitive landscape has gotten even busier in
the past three months, signaling GMCRs future domination of the single-serve
coffee market is no sure thing. Two main patents for Green Mountains famous
K-Cup single-serving coffee pods expire in September 2012. After that, expect a
donnybrook to break out as competitors horn in on GMCRs territory. However,
Green Mountain owns at least 37 patents on the appearance and construction of
the pods, so its difficult to assess the value of these two specific patents. Of
course, that might not even matter. InvestorPlace Editor Jeff Reeves pointed out
in October that Rogers Family Co. an independent coffee roaster based in
Lincoln, Calif. already is selling a single-cup pod under the San Francisco Bay
brand that is fully compatible with the Keurig system. In addition to Rogers
Family selling these pods on their website for $6.99 per 12-pack, theyll also be
available at Costco (NASDAQ: COST ), Safeway (NYSE: SWY ) and other grocery
stores. In November, Bloomberg quoted analyst Mark Astrachan of Stifel Nicolaus
& Co. as saying this about the direct competition: The recent rollout of a
Keurig-compatible pod from Rogers Family will negatively impact longer-term
K-Cup profitability. This is just the tip of the iceberg. When Starbucks
(NASDAQ: SBUX ) and Green Mountain announced their partnership in March, many
pundits wondered why the coffee giant didnt just buy the Vermont-based company
instead. They argued that 80% of Starbucks customers dont own a single-serve
machine, making them ideal candidates for both the machine and its pods. Thats a
nice thought. However, the cost of that acquisition would likely have been close
to $9 billion given the price of its stock immediately prior to the
announcement. It made no sense investing that kind of capital when there was a
real possibility that other systems were equally capable of brewing single-serve
coffee. Nine months later, and the pundits have egg on their face as it has
become abundantly clear this partnership isnt going to be as rewarding as first
thought. Keurig is suing Rogers for patent infringement. From a Starbucks
perspective, it would be a lot less expensive to buy Rogers, notwithstanding the
litigation it would face from Green Mountain. Hedge fund manager David Einhorn
believes Green Mountains market share has peaked and is thought to be shorting
its stock. Stifel Nicolaus is also bearish on Green Mountains future, giving it
a sell rating because of weakening sales. According to Astrachan, shipments of
the Keurig machine, which is made in China, declined by 5% in October and 28% in
November, suggesting a deceleration of sales is under way. With inventories
double what they were a year ago, its certainly possible. Furthermore, analyst
Greg McKinley of Dougherty & Co. believes more Americans are buying coffee
machines other than the Keurig brand these days, suggesting the bloom is off the
rose. Is Green Mountain a fad? If you believe single-serve coffee is here to
stay, your answer has to be no despite the increased competition. On the other
hand, if single-serve coffee portions never get past 8% of the entire coffee
market, Green Mountain returns to being just another coffee roaster. Worst-case
scenario: Starbucks bolts from the partnership. That would be the kiss of death
for Green Mountains stock. Dont think it will happen? Starbucks terminated its
relationship with Kraft (NYSE: KFT ) in 2010 at a possible cost of more than $1
billion in termination penalties. If Starbucks CEO Howard Schultz isnt getting a
reasonable return on his investment, he wont hesitate to back out of the deal.
Unfortunately for Green Mountain, it doesnt have a Plan B. As of this writing,
Will Ashworth did not hold a position in any of the aforementioned stocks.