The stock trades for 72 times earnings, and the company is built around a coffee-brewing technology that will lose key patent protection next year. Sound like a buy?
More than 80% of Green Mountain's revenue derives from its Keurig coffee machines and the K-cups that have become ubiquitous in many office kitchens. (Convenience comes at a price: Green Mountain charges the equivalent of $35 a pound for coffee in K-cups, says Greg Fraser of the GRT Absolute Return fund, which is short the stock.) The company doubled its earnings last quarter.
But Green Mountain will lose patent protection for the K-cups in 2012. That means that Starbucks, Dunkin' Donuts, or any other coffee purveyor can start marketing its own K-cups for Keurig machines next year without being required to pay a dime in royalties or licensing to Green Mountain. We're not saying Green Mountain won't survive the patent expiration. However, at the current price, we see no compelling reason for being there to find out.
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