$GMCR Fiscal Q4 Preview

by Dan November 27, 2012 1:18 pm • Commentary

Event: GMCR reports their fiscal Q4 after the close tonight.  The options market is implying about a 20%* move following the report which is shy to the 4 qtr avg move of about 34%.

*(I am calculating the implied move vs stock reference of about $29 using the Nov30th weekly 29 straddle which is offered at about 5.70.  If you bought the Nov 29 straddle today for 5.70 into the print,  you would need at least a 5.70 move higher or lower to break-even on Friday’s close, or about 20%)  

Sentiment: GMCR remains one of the most controversial names in the entire U.S. equity market.  The stocks short interest sits at about 40% of the float, while the Wall Street analyst community remains fairly Bullish with 11 Buys, 3 Holds and only 1 Sell, with an avg 12 month price target of about $38, or about 20% higher than current levels.  The news flow remains pretty divergent, as it appears high profile short sellers continue to dig in (Einhorn recently reiterated his bearish view, here), the company just announced a very high profile new CEO from Coca Cola to helm the beleaguered coffee distributor.

Price Action / Technicals:  The stock has been all over the place this year after having a fairly traumatic year in 2011 that saw the stock decline more than 70% from the highs.  In 2012 the stock is down 36%, down 60% from the highs, but now up 60% from the lows made in July.

The chart is at a slightly interesting spot, as it has broken above the downtrend line from the 2012 highs and banging up against a resistance level that has been in place since the May earnings gap.

[caption id="attachment_19823" align="aligncenter" width="490" caption="1 YR GMCR chart from Bloomberg"][/caption]


Implied Volatility:  30 day at the money implied vol is about 100! which is fairly rich to the 30 day realized of 55 and the 60 day realized of 66.  While 100 seems very high over the last 4 qtrs IV has gotten that high or higher on 3 occasions prior to earnings and then come back to about 60.  The Nov weeklies are 245 vol, and Dec is 109. Chart below shows that post earnings implied vol usually settles back around 60 post results.

[caption id="attachment_19824" align="aligncenter" width="490" caption="GMCR 30 day at the money Implied Vol over the last year from Bloomberg"][/caption]


MY VIEW:  Now matter how you chose to play, long premium options trades will not be easy to make money UNLESS you get an out-sized move.  Just because the stock has moved 30% plus over the last 4 qtrs, does not exactly mean that the stock’s 20% implied move is cheap, the 4 qtrs prior to moving 34% on avg, the stock avg about 15%, which still puts the 8 qtr avg move above the implied  move.

No matter what your inclination is from a directional standpoint, selling the Nov30th weekly expiration at the money options with IV above 200 are a SALE.  Calendars make sense!


Expectations From Bloomberg:

By Courtney Dentch
Nov. 27 (Bloomberg) — Green Mountain Coffee likely to reaffirm FY2013 forecast when it reports 4Q post-mkt today; watch comments on competition, incoming CEO.

* 4Q adj. EPS est. 48c (range 46c-49c); Aug. forecast 45c-50c
* 4Q rev. est. $904.67m (range $880m-$931m); forecast $889.9m-  $925.5m
* 4Q gross margin est. 33.4% vs 34.9% Q/q, 35.7% Y/y

* GMCR expected to reaffirm FY2013 forecasts on easing coffee prices, manufacturing partnerships: Lazard
* NOTE: Aug. 1: GMCR saw FY2013 EPS $2.55-$2.65, est. $2.49; saw rev. $4.39b-$4.58b, est. $4.41b
* Manufacturing pacts with Dr Pepper Snapple, Costco may help
add back 300bps in lost margin due to unfulfilled capacity:  Lazard
* Favorable coffee prices may boost FY2013 margins by 100-200bps: Lazard
* Stifel Nicolaus sees 1.75m Keurig brewers shipped in 4Q, vs
1.35m yr ago; sees 1.84m K-Cups shipped systemwide in 4Q, vs 1.25m yr ago
* Brewer sales may have gained on 20% rebate offered late Sept.-Oct.; competing devices from  Starbucks, Hamilton Beach, Bunn likely drove decision to offer discount: Stifel
* NOTE Nov. 1: SBUX said 500m branded K-Cups shipped in yr ended Sept. 30
* Watch comments on CEO transition: Brian Kelley, president of Coca-Cola Refreshment unit, named to post effective Dec. 3