Shares of Green Mountain Coffee Roasters (Nasdaq: GMCR) popped 7% higher yesterday, a welcome break from the beating that the king of K-Cups has endured since an accounting investigation was launched by the Securities and Exchange Commission two weeks ago.
Unfortunately, the bounce has nothing to do with a quick resolution to the company's SEC woes. Green Mountain's caffeinated spurt is fueled by rumors that Nespresso parent Nestle (OTC BB: NSRGY.PK) is readying a buyout bid.
The acquisition would make perfect sense. Nestle is the world's largest food company, and the success of its Nespresso machines and capsule refills find it spitting out shots of espresso throughout Europe. Stateside has been a harder market for Nespresso to crack, as Green Mountain's Keurig is the single-cup brewer of choice for java junkies smitten by American-style coffee.
Rumors of a Nestle buyout have surfaced in the past, but -- for once -- Green Mountain is vulnerable.
Instead of chasing Green Mountain up a skyward trajectory, the stock has switched to decaf since the revenue recognition concerns were raised in a corporate filing late last month. Even if the irregularities prove minor, Green Mountain's credibility has been sucker-punched. It may take some time before it regains its momentum as a growth stock darling. An exit strategy -- if the premium is right -- isn't out of the question.
Nestle may have company if the buyout rumor is for real. Keurig's popularity is undeniable. Revenue soared 64% in its latest quarter. It has been buying up many of its largest K-Cup partners, easing concerns over upcoming patent expirations.
J.M. Smucker (NYSE: SJM) announced that it would enter the K-Cup market with its Folgers and Millstone brands earlier this year, so why not swallow Green Mountain whole? Italy's Luigi Lavazza acquired a 7% stake in Green Mountain two months ago, and has the option to purchase as much as 15% of the company. Why not snap up the remainder? Mr. Coffee parent Jarden (NYSE: JAH) announced a deal to crank out K-Cup machines. Hardware isn't Green Mountain's strong suit when it comes to margins, but can't a buyer come from the kitchen appliance space?
We also can't dismiss Starbucks (Nasdaq: SBUX), which has tried to make a splash with its VIA instant coffee. Beyond playing nice with refill discs for Kraft Foods' (NYSE: KFT) Tassimo, it has mostly stayed out of the single-serve brewers.
Investors shouldn't buy Green Mountain solely for the sake of the buyout buzz. An acquisition makes sense, but it's purely speculative at this point.
Shareholders need to stay alert -- and caffeinated.
© 2010 UCLICK L.L.C.