Green Mountain Coffee Roasters (GMCR) surged over 11% on Thursday and was up almost 15% at its highest point on a strong earnings beat. EPS were at 89 cents and revenue was up 22% at 1.05 billion, both much higher than Wall Street consensus.
This earnings call was an important transition for GMCR, and early investors who believed in this growth story are now getting a healthy return on their initial investment. Scalpers and day traders are making a buck or two, sure, but the real money has been made in those who saw value in Green Mountain when the company first started expanding, back in 2008. The stock is up over 800% since then.
The Buyback Trick
While revenue growth of 22% is very strong, it is more indicative of a company transitioning from ultra-growth to a mature but established market presence. GMCR’s management obviously knows this is the case, as evidenced by two decisions that were announced on this earnings call.
The first was the announcement to buy back shares. While GMCR has been buying common stock for some time, management announced that they will start buying up to $1 billion of the company’s outstanding stock from shareholders. Remembering that scarcity rises prices, this is a clear sign that GMCR’s stock will rise in value in the long term as they become less plentiful.
While this is great news for stockholders, it is also indicative of GMCR’s transition from ultra-growth to mature growth. Fast growing companies, like Pandora (P), which more recently reported decent revenue growth, issue more stock to get cash to fuel expansion. Buying back shares is sometimes seen as a poor use of funds when a company is trying to expand, but a good use of funds when a company sees its growth rate plateauing. The market and GMCR seem to agree that now is a good time to buy back stocks as the company has hit its sweet spot in the coffee marketplace.
Dividends and Growth
The second indication that GMCR expects mature growth is its announcement that it will start paying a quarterly dividend of 25 cents. Growth stocks don’t pay dividends for the same reason that they don’t buy shares—they need the capital to grow the business. By paying dividends, GMCR is suggesting that its position in the marketplace is changing, and while it expects further expansion, the pace of expansion is not going to remain very high for long.
Investing for the Long Term
The case of GMCR’s smooth transition from high-growth to dividend-paying stock is a classic example of how buy-and-hold stock-picking can make a lot of money. Anyone who saw this coming in 2008 or 2009 made a lot of money. While day traders may feel satisfied making 11% in one day, long-term investors in GMCR can be much happier to have increased their capital 8x over several years by believing in this growth story. 8x growth is not very easy to do as a day trader—but it’s simple if you recognize good coffee and good value.