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Bill Alpert looks at one of the hottest stocks around, Green Mountain Coffee Roasters (GMCR), and isn't impressed:

At almost 60-times the earnings forecast for the current fiscal year ending Sept. 2009, Green Mountain's valuation warrants a closer examination of the business. That's more than it seems to have gotten from sell-side bulls -- none of whom said much about why March earnings beat analysts' forecasts by 40% when sales beat forecasts by only 8%. Powering those earnings was an 85% jump in the royalties Green Mountain gets from other companies selling coffee in its K-Cup single-serve pods. As it turns out, a significant portion of those royalty generating sales were to Green Mountain itself, which sells both its own coffee pods, and those of other brands. By boosting its wholesale purchases from K-Cup licensees, Green Mountain can trigger royalty payments that directly boost its profits. Indeed, Green Mountain nearly tripled its March-quarter purchases from one licensee -- the publicly-held Diedrich Coffee (DDRX) -- thereby generating royalties that we estimate were almost 10% of the $21 million in pre-tax profits that Green Mountain reported in the quarter. As the bottom-right chart shows, Green Mountain has benefited from these transactions for many quarters; Diedrich is just one of a number of K-Cup licensees from whom it has made royalty-triggering purchases. In March, Green Mountain bought the wholesale business of a struggling licensee -- the Tully's unit of TC Global -- whose sales to Green Mountain had been rising like Diedrich's.

Posted by edelfenbein at May 30, 2009 3:30 PM