Green Mountain Getting Steep

The management of Green Mountain Coffee Roasters, Inc. (GMCR) is implementing a growth strategy based on a multi-channel geographic penetration business model. The company is expanding geographically and by adding new relationships, such as McDonald's Corp.'s (MCD) and Lowe's Companies, Inc. (LOW).

Having generated 23 consecutive quarters of double-digit sales growth and eleven consecutive quarters with growth in excess of 25%, the stock is fairly valued at a premium P/E. In fiscal 2008, the management expects top-line growth of 44% to 46%. The stock is rated a Hold due to high valuation, rising input costs and an unfavorable product mix shift.

Green Mountain is a growth company in the growth sector. It is in the process of growing from a regional to a national company. In August, the company acquired a new manufacturing facility at Knox County, Tennessee for $10.4 million. The 334,000 square foot facility is expected to support the brand's national expansion and continued growth in the single-cup business.

Green Mountain Coffee Roasters is currently selling at 47.4 times trailing 12 month EPS, reflecting the company's higher-than-average growth profile, given the company's exposure to the attractive premium coffee industry and successful business model. Over the last few years, the stock has traded in a very wide P/E range of 14 to 98, with the stock only having traded above a 40 P/E since November 2006.

Net sales have grown at a 33.7% five-year compound annual growth rate (CAGR). Better-than-expected quarterly results along with the management's positive outlook for fiscal 2008 bode well for the company. The target price is $38.50, which is a 50 P/E multiple on 12-month trailing earnings.

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