Food Processing Stocks

Keurig Green Mountain Inc Valuation – January 2016 Update $GMCR

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – November 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Keurig Green Mountain Inc (GMCR) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Keurig Green Mountain, Inc. is a personal beverage system company. The Company is engaged in producing specialty coffee, coffeemakers, teas and other beverages in the United States and Canada. It operates through two segments: Domestic and Canada. Its Domestic segment includes all operations and immaterial operations related to international expansion in the United States, and the Canada segment includes all Canadian operations. Its products include pods, brewers and accessories, and other products and royalties. Its Domestic segment sells brewers, accessories, and sources, produces and sells coffee, hot cocoa, teas and other beverages in its pods (portion packs), and coffee in other packaging. Its Canada segment sells brewers, accessories, and sources, produces and sells coffee and teas and other beverages in pods. It sells coffee in traditional packaging under various brands to retailers, including supermarkets, restaurants and other markets through its Website.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of GMCR

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $13,317,180,014 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.52 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 1234.65% Pass
6. Moderate PEmg Ratio PEmg < 20 27.53 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 5.11 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.52 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.49 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

GMCR value chart January 2016

EPSmg $3.24
MG Growth Estimate 15.00%
MG Value $124.82
Opinion Undervalued
MG Value based on 3% Growth $47.01
MG Value based on 0% Growth $27.56
Market Implied Growth Rate 9.51%
Current Price $89.25
% of Intrinsic Value 71.50%

Keurig Green Mountain Inc qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the short dividend history along with the high PEmg and PB ratios.  The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.30 in 2012 to an estimated $3.24 for 2016.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 9.51% annual earnings loss over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Keurig Green Mountain Inc (GMCR)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

GMCR charts January 2016

Net Current Asset Value (NCAV) $1.45
Graham Number $35.96
PEmg 27.53
Current Ratio 2.52
PB Ratio 5.11
Dividend Yield 1.29%
Number of Consecutive Years of Dividend Growth 3

 

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Most Recent Balance Sheet Figures

Balance Sheet Information Sep2015
Total Current Assets $1,517,203,000
Total Current Liabilities $602,124,000
Long-Term Debt $447,953,000
Total Assets $4,001,577,000
Intangible Assets $1,171,293,000
Total Liabilities $1,292,219,000
Shares Outstanding (Diluted Average) 155,275,000

Earnings Per Share History

Next Fiscal Year Estimate $3.25
Sep2015 $3.14
Sep2014 $3.74
Sep2013 $3.16
Sep2012 $2.28
Sep2011 $1.31
Sep2010 $0.58
Sep2009 $0.45
Sep2008 $0.19
Sep2007 $0.12
Sep2006 $0.08
Sep2005 $0.09
Sep2004 $0.08
Sep2003 $0.06
Sep2002 $0.06
Sep2001 $0.06
Sep2000 $0.04
Sep1999 $0.03
Sep1998 -$0.01
Sep1997 $0.01
Sep1996 $0.01

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $3.24
Sep2015 $3.07
Sep2014 $2.76
Sep2013 $2.03
Sep2012 $1.30
Sep2011 $0.71
Sep2010 $0.37
Sep2009 $0.24
Sep2008 $0.13
Sep2007 $0.09
Sep2006 $0.08
Sep2005 $0.07
Sep2004 $0.07
Sep2003 $0.06
Sep2002 $0.05
Sep2001 $0.04
Sep2000 $0.02

Recommended Reading:

Other ModernGraham posts about the company

The Best Companies of the Food Processing Industry – October 2015
5 Undervalued Companies with a Low Beta – August 2015
5 Undervalued Companies for Enterprising Investors Near 52 Week Lows – July 2015
The 20 Best Stocks For Value Investors This Week – 7/25/15
5 Undervalued Companies with a Low Beta – July 2015

Other ModernGraham posts about related companies

Monster Beverage Corp Valuation – January 2016 Update $MNST
Mead Johnson Nutrition Co Valuation – November 2015 Update $MJN
Archer Daniels Midland Valuation – November 2015 Update $ADM
The Best Companies of the Food Processing Industry – October 2015
J.M. Smucker Company Valuation – October 2015 Update $SJM
Keurig Green Mountain Inc. Valuation – October 2015 Update $GMCR
Monster Beverage Corporation Analysis – October 2015 Update $MNST
B&G Foods Inc. Analysis – September 2015 Update $BGS
Hormel Foods Corporation Analysis – September 2015 Update $HRL

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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