Green Mountain Plateaus a Bit
Green Mountain Coffee Roasters, Inc. (GMCR) is a growth company in the premium coffee and tea industry. Management 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 with McDonald's (MCD) and Lowes Companies (LOW).
Having generated 21 consecutive quarters of double-digit sales growth and nine consecutive quarters with growth in excess of 25%, the stock is fairly valued at a premium P/E. The stock is rated a Hold, primarily because margins are under pressure due to rising input costs and an unfavorable product mix shift.
Green Mountain Coffee Roasters is currently selling at 48.6 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. On March 5, 2008, Green Mountain Coffee Roasters announced an 8% to 12% price increase for coffee products. The pricing changes will be effective on orders placed on or after May 5, 2008.
The price increase is in response to the sharp rise in the price of coffee, price increases of other raw materials, and higher energy and transportation costs. Management cited that the costs for the high-quality coffees used by Green Mountain Coffee have risen even more than the general commodity of coffee.
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 29.1% five-year compound annual growth rate (CAGR) and the company has generated 21 consecutive quarters of double-digit sales growth. Better-than-expected quarterly results along with management's positive outlook for fiscal 2008 bode well for the company. The target price is $28.50, which is a 38 P/E multiple our fiscal year-end earnings estimate.
Buy Initiated on Quicksilver Rsrcs
We are initiating coverage on Quicksilver Resources (KWK) with a rating of Buy and a 12-month estimated target price of $39.00 per share. The company has had stellar growth from its late development phase Barnett Shale gas play in North Texas. Projected to ramp up to full-scale production in 2008, Quicksilver should experience a 69% increase in aggregate year over year production and a near 150% increase in North Texas gas production.
The added value of natural gas liquids contained Barnett of the Fort Worth unconventional gas play, coupled with the four Tcfe of potential reserves in Quicksilver's North Texas defined fairway, gives the company a continued platform for low-cost, low-risk reserve and production growth for several years to come. Hence our Buy rating.
With our estimated 2008 EBITDA, Cash Flow and Debt levels, a price target of $39.00 yields an enterprise and price to cash flow multiple of 11X, respectively, both within historical and appropriate ranges. Again, KWK receives a premium with respect to its peers because of the higher than normal future growth expectations mainly attributable to the ramp-up of the Barnett Shale play in the Fort Worth Basin.
National Semi Still Rates a Buy
National Semiconductor (NSM) is an OEM of analog and mixed signal integrated circuits. February quarter results were short of consensus expectations, as the company saw both order rates and backlog drop off. Forward guidance is for flat to down revenue in Q4. New higher-margin products continue to grow in the mix, although lower sales levels could increase idle capacity and squeeze margins.
The share price continues to decline, making the stock cheaper. Consequently, we are reiterating our Buy rating on NSM shares. The higher utilization rate, production effciencies, higher ASPs and a more favorable product mix almost offfset the impact of much lower revenues in the last quarter.
The fully diluted pro forma earnings per share was $0.40 compared to $0.45 in the previous quarter and $0.31 in the February quarter of last year. The pro forma calculations exclude some restructuring and deferred stock compensation expenses, as well as some discrete tax benefits in the last quarter.
