Green Mountain Coffee Roasters Inc.'s shares rose Thursday after a Key Banc analyst gave an upbeat assessment of the company's near-term prospects.
THE SPARK: Analyst Akshay Jagdale said the market is expecting a price war over single-serve coffee pods will erupt once the company's key patents expire in September. As a result many investors expect the company will lower its 2013 earnings estimates.
However Jagdale believes there is a shortage of single-serve coffee products that will help Green Mountain. The analyst kept a "buy" on the company's shares and a $55 price target.
THE BIG PICTURE: Green Mountain was a pioneer of single-serve coffee in the U.S. with its Keurig machines and coffee pods. The company grew quickly but struggled as competitors began releasing their own versions of single-serve systems. The company's patents on a number of its products are expiring, opening the door for more competition.
The company has also faced a multi-year Securities and Exchange Commission inquiry into its accounting practices, and its CEO was ousted after he made a stock sale that violated company policy.
Green Mountain has since hired a new CEO, changed board members, added new brewer models and extended the array of single-serve beverage packets it sells. The company has maintained that its growth will moderate from its early years but its most recent quarter beat analyst expectations and it is upbeat about fiscal 2013.
THE ANALYSIS: Jagdale believes that there are will be limited number of single-serve coffee products. Through conversations with numerous companies in the industry, he found that some manufacturing and quality issues point toward a shortage of product.
So some retailers are reconsidering Green Mountain products as an alternative to non-licensed manufacturers. Additionally he believes that coffee prices are going to be a more significant tail wind for Green Mountain in 2013.
Jagdale said he feels more confident about the company's ability to meet or beat its 2013 guidance, given the unlikely price war and lower prices.
SHARE ACTION: Green Mountain's shares were up 7.1 percent in afternoon trading at $44.01. The stock is slowly recovering after a wild ride. It hit an all-time high of $107.99 in the fall of 2011 but was down to $17.49 by last summer. Since then it has gradually climbed, as investors regained hope that the coffee company still has a viable future.