Option Millionaires

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Just so you know, Roth Capital defending GMCR, this was on Barrons online last night...

http://online.barrons.com/article/SB50001424052748704424504577030162840341538.html?mod=BOL_hps_oe

Hot Research PM | THURSDAY, NOVEMBER 10, 2011 Roth Capital: Green Mountain Selloff 'Ridiculous'
Why investors should use Thursday's rout to buy the former Wall Street darling.

Fourth-quarter sales increased 91% to $712 million, below management's guidance of a 100% to 105% increase and our estimate of sales of $770 million in the quarter. This "shortfall" triggered a sharp decline in the share price.

Despite the supposed sales glitch, earnings per share of 47 cents versus 20 cents was on target.

Management attributed the less-than-expected sales primarily to changes in K-Cup ordering patterns in grocery and club channels. Management noted that retail sales trends remained on target throughout the quarter, implying that some retailer inventory levels had changed. One obvious explanation is that the company preannounced a K-Cup price increase during the third quarter and some large chains probably built inventory prior to the raise. If so, this implies absolutely nothing regarding future sales trends, and the subsequent one-third decline in the share price offers an unusually attractive buying opportunity in our view.

.K-Cup sales volume increased 76% for the full year, slightly ahead of our estimate, which we believe implies close to an 80% increase in the fourth quarter.

Capital expenditures in fiscal 2012, a bone of contention for some, are estimated at between $630 million and $700 million, a sharp increase from $290.3 million in fiscal 2011 and $134 million in fiscal 2010. Of that amount, $225 million is earmarked for increased K-Cup capacity, $100 million for packaging capacity related to next-generation Keurig brewing platforms, $175 million to expand existing plants, research-and- development facilities and office space, $100 million for coffee processing equipment, and $65million for information-technology infrastructure and systems.

A next-generation brewer and K-Cup platform will be introduced later this year, to accommodate larger size K-Cups used for the Barista Prima line, Starbucks and brewed over ice coffee. A third new platform for a one-touch single-cup espresso and specialty coffee product is also being developed and should be introduced for next year's holiday season.

Management estimates its household penetration at between seven million and nine million. We believe that potential penetration is a multiple of that level, and we anticipate sustained rapid sales and earnings growth.

While the sharp after-market price decline may have been driven by option trading, we would observe that should the stock remain at depressed levels while sales growth remains rapid, speculation about a possible acquisition of the company is likely to resurface.

Our price target of $120 is based on the probability of rapid sales and earnings growth for an extended period, as the recent addition of Starbucks as a licensee is likely to bring a significant number of new users to the single-cup market. Currently the stock is priced at 27.4 times estimated fiscal 2012 EPS and 17.8 times fiscal 2013 projected EPS or 30% of its projected three-year EPS growth rate of 60%, which we believe may be exceeded. We note that other leading premium coffee producers, Peet's Coffee and Tea and Starbucks, with projected EPS growth rates of around 20% and 17%, respectively, have valuations equal to or greater than their growth rates.

-- Anton Brenner