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On January 23, 2013, we upgraded the leading coffee maker, Green Mountain Coffee Roasters Inc. (GMCR - Analyst Report) to Outperform backed by the company’s efficient measures and strategic agreements to drive out competition following the expiry of the K-cup patents. The company has also rolled out new products to turnaround its business.

Why the Upgrade?

Green Mountain is expected to make a strong start with its first quarter 2013 results, scheduled to report on Feb 6, considering its upbeat fourth quarter 2012 results, initiatives to rule out competition, new product roll outs, and better visibility for fiscal 2013.

Green Mountain has a Zacks Rank #1 (Strong Buy) and an Earnings ESP (Read: Zacks Earnings ESP: A Better Method) of +3.1%. This is very meaningful and a leading indicator of a likely positive earnings surprise in the coming quarter.

In addition, the company is optimistic about fiscal 2013, as the company raised its earnings outlook for the fiscal 2013 to a range of $2.64 to $2.74, up from the prior expectation of $2.55 to $2.65. The sales estimates for fiscal 2013 were raised by 88.6% from the previous guidance to $4.5 billion.

Following the release of fourth quarter results, the Zacks Consensus Estimate for 2013 grew 7.2% to $2.68 per share over the last 90 days.

What is the cause for the strong positive bias on the company?

The fourth quarter earnings upswing prompted us to be optimistic on the stock. The company reported strong fourth quarter 2012 earnings of 64 cents, which surpassed the Zacks Consensus Estimate of 36.0%. Revenues increased 33.0% from the year-ago period to $946.7 million, reflecting the success of Keurig Single Cup Brewers, single serve packs (K-cups), and Keurig-related accessories.

The company is focusing on its products and putting in efforts to turnaround its business. Apart from rolling out new products, Green Mountain Coffee Roasters is upgrading its Keurig brewing system, by introducing a new Keurig Vue V1200 Brewer, designed with RFID (radio frequency identification) technology allowing users to have control over the strength, size and temperature of their beverages.

The company has also launched affordable Keurig brewer models in order to reach out to more consumers. Green Mountain is very active toward adding value to its brands and we believe that this value addition will spur revenue growth momentum in future.

Further, Green Mountain has managed to appeal consumers even after its patents for the K-cups expired in September 2013. Green Mountain’s owned and partnered brands are priced at the same level as that of its aggressive competitor Mondelez Int.'s (MDLZ - Analyst Report) unlicensed Maxwell House and Gevalia single-serve coffee pods compatible with Keurig brewing systems, thus ruling out competition. But Green Mountain still holds an upper hand as it offers more coffee bag count per box, compared with Kraft’s brands.

Moreover, we expect Green Mountain’s market share to remain intact as the private label K-cups from companies like Treehouse Foods and Maxwell House and Gevalia brands of Kraft Foods which are sold at retail outlets like Wal-Mart Stores Inc (WMT - Analyst Report) do not seem to have a positive customer feedback.

Green Mountain is also focusing on competing with private label as it has entered into an agreement with Costco Wholesale Corp. (COST - Analyst Report) under which it will make private-label Costco Kirkl and Signature brand K-Cup packs for the Keurig single-cup brewing system.

Other Stocks to Consider

You can also consider investments that offer exposure to the attractive food industry. Some such stocks are Farmer Brothers Co. (FARM - Snapshot Report), Sysco Corporation (SYY - Analyst Report) and Vitamin Shoppe Inc. (VSI - Snapshot Report) that carry a Zacks Rank #2 (Buy).

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