Large farm products companies like Archer Daniels Midland Co. (NYSE: ADM) and Bunge Ltd. (NYSE: BG) have watch corn and wheat prices decline by about -20% and -29% since peaks earlier this year. Fertilizer prices have risen and so have fuel prices. All have an impact on revenues and earnings.

Processing companies like Tyson Foods Inc. (NYSE: TSN), Smithfield Foods, Inc. (NYSE: SFD), Corn Products International Inc. (NYSE: CPO), and ConAgra Foods, Inc. (NYSE: CAG) package private label foods, provide commercial food, and even offer some branded products. The diversity of their customers gives them a bit of a barrier against a collapse in one or another of their markets.

Packaged food giants like Kraft Inc. (NYSE: KFT), Sara Lee Corp. (NYSE: SLE), General Mills, Inc. (NYSE: GIS), and Kellogg Company (NYSE: K) are all household names and depend on strong brands to carry them through slow economic times.

Data from Yahoo! Finance, and current share prices gathered about noon today.

Archer Daniels Midland Co. (NYSE: ADM) has a median target price of $35.00 from 13 brokers. Shares are trading today at $28.88, for an implied gain of $6.12, or 21%. ADM’s forward P/E is 8.52 and the company pays a dividend yield of 2.3%. The stock’s 52-week trading range is $23.69-$38.02, and at today’s price that’s about 22% above its 52-week low and 24% below the 52-week high. This year’s wheat harvest looks to be on a near-record pace, and wheat prices are expected to fall to below $6/bushel by the end of the year from a current price of around $6.36.

Rising corn prices hit ADM hard in its most recent quarter, lowering profit in its biofuel (ethanol) division by -23% and in its sweetener and starches division by -81%. Corn prices are currently expected to remain about the same into next year, which won’t help ADM’s processing revenue. Fortunately for the company its trading profits will get a boost from the higher corn prices.

Bunge Ltd. (NYSE: BG) has a median target price of $74.00 from 11 brokers. Shares are trading today at $61.38, for an implied gain of $12.62, or 21%. Bunge’s forward P/E is 9.32 and the company pays a dividend yield of 1.6%. The stock’s 52-week trading range is $54.03-$76.13, and at today’s price that’s about 14% above its 52-week low and 19% below the 52-week high.

Bunge missed EPS estimates badly in its third quarter as the company ran afoul of volatility in the grain markets. The company painted a brighter picture for its fourth quarter, basing its view on the tightness of supply and the rising demand for food.

Tyson Foods Inc. (NYSE: TSN) has a median target price of $23.00 from 15 brokers. Shares are trading today at $19.27, for an implied gain of $3.73, or 19%. Tyson’s forward P/E is 9.53 and the company pays a dividend yield of 0.8%. The stock’s 52-week trading range is $14.79-$20.12, and at today’s price that’s about 30% above its 52-week low and 4% below the 52-week high.

Tyson will report earnings for its fourth fiscal quarter on November 21st. The consensus EPS estimate is $0.32, half as much as the same period a year ago. Rising feed costs have hammered revenues and earnings this year, and Tyson and other chicken producers are trying to get its customers to share commodity price risk by taking shorter term contracts tied to the cost of feed grains.

On Ben & Jerry’s home page, the company’s Board of Directors, the chief scoopers of eclectic flavors — Cherry Garcia, Chubby Hubby, and Schweddy Balls, to name a few – promulgated to “those who occupy,” that the company stood with them:

“We, the Ben & Jerry’s Board of Directors, compelled by our personal convictions and our Company’s mission and values, wish to express our deepest admiration to all of you who have initiated the non-violent Occupy Wall Street Movement and to those around the country who have joined in solidarity.”

 From sourcing eggs in its ice creams only from free-range chickens to buying containers from paper suppliers exercising sustainable forestry practices, the board’s recent enjoinment epitomizes the core of the company’s mission statement.  Additional declarations of sympathy on Ben & Jerry’s website include protests against the “inequity that exists between classes in our country” and how “many workers who have jobs have to work 2 or 3 of them” simply to get by.

Protests or Profits?

Occupy Wall Street is a “people-powered” protest that began on September 17, 2011, in Liberty Square in Manhattan’s Financial District, and has spread to over 100 cities in the United States, according to the movement’s unofficial de facto online resource. To date, the resistance movement marches daily under the collective banner of “restoring people’s democracy in America.” However, as the assemblies have attracted divergent crowds, from anarchists and unemployed or underemployed college graduates to sixties throwbacks, the collective has yet to coalesce under a singular message, other than a media-inspired banner: Taking back economic power from major banks and multi-national corporations (Wall Street) – whose corrosive greed (the narrative continues) fueled the global economic collapse in 2008.

Are Ben & Jerry’s actions nothing more than cheap platitudes, an attempt to co-opt a burgeoning grass roots organization through tasty treats? “An improved means to an unimproved end,” observed American poet and philosopher Henry David Thoreau. Skeptics remind us that sales and profits of Ben & Jerry’s flow directly to Unilever, a consumer-goods conglomerate that purchased the Vermont-based food purveyor in 2000 for $326 million.

Part of the Solution – or Part of the Problem?

Unilever generated more than $60 billion in sales last year from operations in more than 100 countries worldwide. Recognizable products in the U.S. include a range of foods and house-hold care items, from Lipton teas to Dove soap and Surf laundry detergent.

On any given day, more than two billion people use a Unilever product, having purchased their goods with a plethora of currencies, from Euros or U.S. dollars to Brazilian reals and Indian rupees. Ergo, whether hedging against currency or commodity risks, Unilever is integrally tied to the hip of major banks.

On October 5, the company completed its $3.7 billion cash acquisition of Alberto-Culver, a leading U.S.-based consumer goods company with personal care products that include the Alberto VO5, Nexxus, and Noxzema brands. This merger followed on the heels of the purchase of Sara Lee Corp.’s (NYSE: SLE) shower-gel and European detergents business for $1.9 billion late last year.

“It is useless for the sheep to pass resolutions in favor of vegetarianism, while the wolf remains of a different opinion.” ~ British theologian William Ralph Inge (1860 – 1964)

Hyena’s cries of morality aside, with more than $10 billion in long-term debt on its balance sheet, Unilever needs ready access to capital to fund ambitious growth plans. Hence, while one hand scoops out ice cream to protestors, the other hand shakes hands with the enemy: Deutsche Bank (NYSE:DB), J.P. Morgan (NYSE: JPM), and UBS (NYSE:UBS) – three Wall Street investment banks who were lead underwriters on an aggregate $1.5 billion in senior notes financing for Unilever last month.

Dogged by complaints from environmental groups about its deleterious environmental and social footprint – such as, allegedly buying palm oil from suppliers cutting down Indonesia’s rain forests; child labor violations in Third-World countries; and, lethal cosmetic testing on animals – the company has taken steps in recent years to clean up and improve its corporate image. Unilever has unveiled its Sustainable Living Plan, meant to improve quality of live for billions while simultaneously “respecting the planet.” Goals management is intent on achieving by 2020 include halving the environmental footprint of its products and sourcing 100% of agricultural raw materials from sustainable sources.

In the last decade, management claims it has reduced greenhouse gas emissions from energy use and water per ton of production consumed by 44% and 66 percent.

To date, Unilever senior management has remained reticent when asked to comment on its ice cream subsidiary’s amiable gesture to Occupy Wall Street protestors. However, should these mostly peaceful demonstrations devolve into bloody violence, Ben & Jerry’s protest endorsement could leave a scarlet stain on Unilever’s hoped-for, globe-friendlier face.

David Phillips

We also want to call out some of the other mergers and acquisitions announced this morning. Mattel Inc. (NYSE: MAT) acquired HIT Entertainment for $680 million. J.M. Smucker Co. (NYSE: SJM) is paying $350 million for the food service coffee and tea business of Sara Lee Corp. (NYSE: SLE). Today’s biggest deal has insurance company CIGNA Corp. (NYSE: CI) paying $3.8 billion for HealthSpring Inc. (NYSE: HS) as the insurance industry keeps on consolidating.

Here are today’s big post-earnings news reactions with prices during the last half-hour of trading: Caterpillar’s shares are up nearly 5%, at $91.66; Eaton Corp. (NYSE: ETN) up about 4.5%, at $44.12; Lorillard, Inc. (NYSE: LO) down less than -0.5%, at $115.16 after missing EPS estimates this morning; Metro Bancorp, Inc. (NASDAQ: METR) down nearly -8% after posting an EPS loss of -$0.41; Netflix Inc. (NASDAQ: NFLX) up more than 1.5% in anticipation of the company’s earnings release after the bell today; and Texas Instruments Inc. (NYSE: TXN) up more than 3.6% on expected earnings after today’s markets close.

Several other standouts from today are as follows…

Adolor Corp. (NASDAQ: ADLR) is up about 132%, at $4.49, on news of its acquisition by Cubist Pharmaceuticals, Inc. (NASDAQ: CBST) for $190 million, or $4.25/share. Adolor’s 52-week trading range is $1.09-$4.53, and the high was set today, anticipating that the company will hit milestones in the acquisition offer that could add up to $35 million to the purchase price.

Sky-mobi Ltd. (NASDAQ: MOBI) is up 42%, at $5.55, on a strategic partnership with SINA Corp. (NASDAQ: SINA). Sky-mobi’s Maopao mobile social network will now be able to offer SINA’s Weibo.com microblog as a downloadable application.

Amtech Systems, Inc. (NASDAQ: ASYS) is up more than 23%, to $11.25. The company, which makes manufacturing equipment for solar makers, is getting boost from today’s rise in solar stocks.

SXC Health Solutions Corp. (NASDAQ: SXCI) is down more than -20%, at $44.98. HealthSpring, which is being acquired by CIGNA, is one of SXC’s biggest customers, accounting for about a third of the company’s sales.

Dataram Corp. (NASDAQ: DRAM) is off more than -10%, at $1.10. Spot prices for dynamic RAM continue to weaken, a trend that caused Micron Technology Inc. (NASDAQ: MU) results to tumble last quarter.

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Paul Ausick

Cubist Pharmaceuticals Inc. (NASDAQ: CBST) is pulling a rabbit out of its hat.  Cubist was once believed to be a solid acquisition candidate when its share price was much lower, but now the company has come out and announced that it is acquiring Adolor Corporation (NASDAQ: ADLR) for about $190 million in a deal that could rise to $225 million if certain milestones are achieved. Adolor loves the price as the shares are up 129% at $4.40 today.  That is above the $4.25 buyout price, but the possible upside for the milestones is why.

HealthSpring Inc. (NYSE: HS) is being acquired for $3.8 billion by CIGNA Corporation (NYSE: CI) in a $55 buyout offer in close to a 35% premium.  Insurers continue to consolidate.  Elsewhere in healthcare, Coventry Health Care Inc. (NYSE: CVH) was listed as one which could be acquired by Barron’s over the weekend and its shares are up almost 6% at $31.66 in conjunction with healthcare consolidation news and on hopes for more pin action.

Mattel Inc. (NYSE: MAT) is acquiring HIT Entertainment in a $680 million acquisition from Apax Partners and a private equity consortium.  Mattel’s market cap is $9.6 billion.  The deal locks up the Thomas & Friends toys.

Rightnow Technologies Inc. (NASDAQ: RNOW) is much more well known ”right now” since Oracle Corporation (NASDAQ: ORCL) has announced a buyout of the company.  This $1.5 billion purchase comes to $43.00 per share and the stock hit a new all-time high of $42.92.  RightNow is in cloud-based customer experience software products and services.

Sara Lee Corporation (NYSE: SLE) is a company that has been a rumored (and hoped for) buyout target for longer than one can easily recall in the food sector.  The company is selling off the majority of its food service coffee and tea operations to J.M. Smucker Co. (NYSE: SJM) for about $350 million.  Considering it is a $10.5 billion company by market capitalization, this is no real game-changer.

Elsewhere in M&A news, Anadys Pharmaceuticals Inc. (NASDAQ: ANDS) is at a year high of $3.68 and it now has a formal class action suit filed against the merger where Roche is set to pay out $3.70 per share. This was a $10 and higher stock in 2006.

NYSE Euronext, Inc. (NYSE: NYX) and its Deutsche Bourse merger is still hanging in the wind.  The merger has a hearing in the European Union on October 27 to address some of the concerns brought up by regulators.  At $26.70 today, this is way down from the highs above $41.00 over the last year.

JON C. OGG

NYT: Sara Lee to Sell Coffee Group to J.M. Smucker

Reuters: Reuters: Caterpillar quarterly earnings rise 44 percent

WSJ: Caterpillar Profit Jumps

WSJ: Kimberly-Clark Cuts Forecast

Yahoo Finance: U.S. firms hold off hiring, but not many layoffs: poll

NYT: Saab Ends Agreements With Chinese Investors

MarketWatch: Oracle to buy RightNow for $1.5 billion; premium works out to about 20%

Yahoo! Finance: Wal-Mart ups the ante in holiday price matching

Douglas A. McIntyre

The maker of Chef Boyardee, Healthy Choice, PAM no-stick cooking spray and other food products, has made several unsuccessful bids for Ralcorp since March, culminating in a recent $94.00 per share offer in cash. St. Louis-based Ralcorp has repeatedly spurned the offers, opining it could best unlock shareholder value by spinning off its Post Foods division, which includes brands Honey Bunches of Oats, Grape Nuts and Fruity Pebbles, from its private label (store brand) and ready-to-eat foodstuffs (like cereals, cookies and pasta).

Golden Parachutes for Key Executives

Considering the purchase price was higher than Ralcorp has ever traded at, it is hard to fathom why senior management failed to endorse ConAgra’s offer, especially given the personal payday that awaited each of them under “change-in-control” clauses contained in their respective employee agreements. In a buyout, co-chief executives Kevin Hunt and David Skarie each stood to pocket, at a minimum, $15 million (including $3.7 million in accrued salaries and cash bonuses, and in excess of $6 million in stock awards). Chief financial officer Thomas Granneman left more than $5 million on the table, too (including $3 million in three-years worth of salary and average annual cash bonuses, and more than $2 million in stock awards). Furthermore, actual payouts to named executives would have been significantly higher, as these severance packages were based on the closing price of Ralcorp on September 30, 2010 ($58.48 a share), according to the 2011 proxy statement.

Post Brand Cereals Were the Future — Back in 2008

That management and the board of directors now believe that a spin-off of Post brands is the better option to boost value for its shareholders — as opposed to an acquisition by ConAgra — is odd, considering the same guys were the cheerleaders behind the $2.6 billion purchase of the same ready-to-eat brands from Kraft Foods (NYSE:KFT) in 2008.

“A transforming event for Ralcorp — the addition of Post cereals gives Ralcorp a truly distinctive line of branded cereal products plus a branded infrastructure and platform that we can build on through organic growth and acquisitions,” David P. Skarie said in November 2007.

For the nine-months ended June 30, segment profit for Post brands contributed 33.3%, or $160.6 million, of $481 million in total segment profits. By comparison, Ralcorp derived just $64.4 million, or 13.3% of income from the manufacturing of third-party cereals. In addition, branded profit margins of 22% almost doubled those of its private-label operations.

Though Post-branded cereals remain the profit cow for the company, the Kraft purchase did not exactly shake up the cereal category or propel Ralcorp above also-ran status. The brand remains mired in third place and, looking ahead, management is acutely aware that growing margins will be difficult, given competitive obstacles, the incessant promotional and bidding wars with industry leaders Kellogg (NYSE: K) and General Mills (NYSE: GIS) for slotting space on the shelves of supermarket chains and discount retailers such as Walmart (NYSE:WMT).

Management has admitted, too, on recent quarterly conference calls that operating efficiency gains will unlikely be significant enough to offset the adverse effect of $200 million in cost inflation, from increases in packaging and freight to primary ingredients (such as durum wheat, cashews and peanuts).

Ralcorp is the nation’s largest supplier of private label cereal, including copycats of more than 30 of the top national brands and (20 hot cereals). Ergo, looking ahead, management believes manufacturing higher unit volumes of store brand products could better insulate forward profitability from the aforementioned competitive headwinds.

Some on Wall St., disagree with Ralcorp’s internal optimism. Morningstar analyst Erin Lash argues that spinning off Post would prove to be a “value-destroying investment for Ralcorp’s shareholders,” as Post trails rivals Kellogg and General Mills in the “highly-competitive’’ cereal category.

It is unlikely that a Post spin-off would improve Ralcorp’s financial flexibility. On June 30, trailing twelve-month total debt stood at 3.2 times operating EBITDA and more than 70% of total assets on the balance sheet was fluff: some $4.8 billion of goodwill and other intangibles.

According to regulatory filings, as part of the split, Post is expected to generate approximately $1 billion in net cash for the company. However, $545 million of these proceeds will go towards the company’s August 2011 purchase of Sara Lee’s (NYSE: SLE) refrigerated dough business, leaving little left over to make a dent in the $2.4 billion in long-term debt.

In addition, the 10Q Detective notes that post-split, private-label Ralcorp will lose the cash flow contribution from the higher-margin branded cereal business!

Break-Up Value?

Ralcorp appears fairly valued based on sector comparisons: 18.6 times trailing twelve-month (TTM) price-earnings, which is 16.2% and 28.7% higher than the TTM of Kellogg and General Mills, respectively.

Wall St. itself is divided on much additional market value a Post cereal spin-off would generate longer-term to existing shareholders, with post-split capitalizations ranging from the mid $70-range up to $90 a share. BB&T Capital Markets analyst Heather Jones estimates the private label part of Ralcorp could fetch an estimated 9 to 9.5 times EBITDA, and Post about 8 times, suggesting a total post-split value of $85 to $90 a share — lower still than ConAgra’s $94 per share (all cash) offer!

“Cuckoo” — but Not for Cocoa Pebbles

Even with a mouthful of cereal and milk, the audible sounds of fiduciary irresponsibility by the board cannot be muffled. One is left to ask, did the board fear losing more than complimentary boxes of Cocoa Pebbles in a ConAgra takeover — such as the cushy $200,000 (+) annual stipend for showing up eight to 13 times a year for board meetings?

While frustrated Ralcorp shareholders are left pondering what possessed the board to ignore ConAgra’s more-than generous merger bid, they might also want to question management on the following potential conflict, too: How come this “independent board” still sits three members with common ties to Energizer Holdings (NYSE: ENR), including William P. Stiritz, who chairs Ralcorp’s board, and J. Patrick Mulcahy, Energizer’s current chairman? It has been 17 and 11 years, respectively, since the food and battery companies were sent packing from the Ralston Purina (NYSE: RAL) family.

Since when does selling batteries make one an expert on food goods? Unfortunately, it is unlikely the Energizer bunny can do much to keep Ralcorp’s stock price “going and going.”

David Phillips

Advanced Micro Devices Inc. (NYSE: AMD) Raised to Buy at UBS.
Alkermes plc (NASDAQ: ALKS) Raised to Buy at Jefferies.
AmSurg Corporation (NASDAQ: AMSG) named Bull of the Day at Zacks.
Electronic Arts Inc. (NASDAQ: ERTS) Maintained Neutral but raised estimates at Janney.
Expedia Inc. (NASDAQ: EXPE) Raised to Overweight at Piper Jaffray.
First Solar Inc. (NASDAQ: FSLR) Raised to Hold at Maxim Group.
Great Plains Energy Incorporated (NYSE: GXP) Raised to Conviction Buy List at Goldman Sachs.
Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR) Started as Buy with $130 target at Argus.
Green Plains Renewable Energy, Inc. (NASDAQ: GPRE) Started as Neutral at Credit Suisse.
Itron Inc. (NASDAQ: ITRI) Started as Overweight at Morgan Stanley.
Netflix, Inc. (NASDAQ: NFLX) Raised to Buy at Merriman.
Occidental Petroleum Corporation (NYSE: OXY) Raised to Buy at Citigroup.
Sara Lee Corporation (NYSE: SLE) named Bear of the Day at Zacks.
United Technologies Corporation (NYSE: UTX) Raised to Overweight at Morgan Stanley.

Also, here are the top analyst calls of the last week which carry over far beyond just the day and week.

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JON C. OGG

ConAgra’s offer for Ralcorp, maker of Post cereals, came in at about $94/share in cash, a level Ralcorp stock had not reached in its entire history. Ralcorp, though has a plan to spin-off the Post cereal business as a separate company, and has been bulking up the other part of its business by making acquisitions of its own.

Ralcorp’s stock dipped below $74/share yesterday before closing at $75.23. The company’s 52-week high is $91.35.

The packaged food business has not exactly been on fire lately. Kraft Foods Inc. (NYSE: KFT) shares are up about 10% since the January, while General Mills Inc. (NYSE: GIS), H.J. Heinz Co. (NYSE: HNZ) and ConAgra are up about half that. Sara Lee Corp. (NYSE: SLE) shares are down slightly since January, as the company pieces itself off. Ralcorp purchased one of Sara Lee’s products earlier this year for $545 million.

Packaged food processors face rising energy costs and wary consumers for their branded products. Many customers are now satisfied to buy private-label products, and not pay the premium for Peter Pan peanut butter. Profits get hit by rising costs which force producers to raise prices which then have to be passed on to consumers. The attraction of Ralcorp for ConAgra was its substantial private-label business, which is more profitable than the branded business, particularly as consumers are looking for ways to save money.

Once Ralcorp spins-off its Post cereal brands, ConAgra or another buyer is likely to return for another go at acquiring Ralcorp. At least that’s what the company’s board is banking on. If a bidding war doesn’t materialize, shareholders could get a bit fiesty over the rejection of ConAgra’s bid.

ConAgra’s shares are down about -2.25% in the pre-market this morning. The stock’s 52-week range is $21.02-$26.60. Ralcorp shares are also down in the pre-market, at $74.74, in a 52-week range of $57.10-$91.35.

Paul Ausick

Green Mountain delivered another stellar cup of java to investors in May, with sales and operating income for its second quarter ended March 26 up 101% and 198% over the prior year to $647.7 million and $119.6 million, respectively. Yet robust operational metrics belie two troubling trends: growing debt load on the balance sheet and an inability to convert profits to sustainable growth in cash flows.

The company produces and sells coffee makers and more than 250 varieties of specialty coffees, cocoa, teas and other beverages. In recent years, growth has been overwhelmingly driven by consumers’ enthusiastic adoption of the company’s patented Keurig’s K-cup brewing system, which lets people brew single-cup, gourmet coffee at home or at work in less than a minute without the hassle of grinding beans, measuring coffee, handling filters or cleaning up.

Consumer research has consistently demonstrated people like the way their coffee tastes when brewed in a Keurig single-serve pod. Green Mountain manufactures and sells the top five gourmet single-cup brewing systems in the U.S., accounting for almost 25% of total coffeemaker unit sales for fourth-quarter 2010, according to The NPD Group. Unlike rivals, Keurig’s patented “injected brewing process” directs the coffee away from the center, producing a strong, flavorful cup of coffee.

K-cup in the driver’s seat

Organic growth is being driven by sales of namesake coffee K-cup portion packs and third-party licensed royalty sales ($0.064 on every single-serve K-cup sold), according to regulatory filings. In the second quarter, net K-cup sales totaled $411.8 million, up 94% (or $199.1 million) compared to the same period in 2010.

This “blades to Gillette” razors growth strategy has required the company to aggressively discount its single-cup brewer machines (slightly below cost) in order to rapidly build a sustainable user-base. An entry-level, one-cup coffee maker from Keurig — or a competitor like (Kraft-owned) Tassimo — is currently priced around $100; the cartridge for each cup is about 65 cents, according to Quick-cup Digest.

In the second quarter, Green Mountain sold 1.2 million Keurig brewers, down from 1.4 million in first-quarter 2011.

Expanding its roasted offerings and geographic footprint is proving to be capital intensive: In the last two years, the company spent almost $1.4 billion to acquire a distribution network, including the May purchase of California-based retailer Diedrich Coffee ($305 million) and the December 2010 acquisition of Canadian coffee roaster Van Houtte (for $908 million).

Keurig owns approximately 80% of the single-serve market in North America. A rapid build-out to own this market, however, is straining an already bloated balance sheet:

• Although most loan obligations don’t come due until 2015 and beyond, debt outstanding increased to $1.06 billion in March, up from $354.5 million last September. Corresponding quarterly interest expenses year-on-year have risen from about $900,000 to almost $16.8 million.
• As a result of recent acquisitions, intangibles (customer relationships and trademarks) and goodwill (excess of purchase price over valuation) now total $1.4 billion, or 52.4% of total assets, up from $606 million, or 44.2% last year. Of concern, Green Mountain might have over-paid to muscle-in on Canadian markets. Goodwill associated with the purchase of Van Houtte was some $472 million — flat coffee sales at the Montreal-based coffee roaster hint at the aroma of an asset write-down in coming quarters, in my opinion, depressing shareholder value.

The company is scaling operations to stay ahead of brewer and K-cup demand. Capital expenditures in the first half of fiscal 2011 doubled to $99 million, due to start-up of new, higher- speed package lines in Tennessee, Vermont, Washington and Toronto. In total, management currently anticipates it will need to invest approximately $275.0 million to $305.0 million in new equipment and distribution channels to meet soaring demand for its K-cup portion packs during fiscal 2011.

With Keurig single-cup coffee brewers in only about 7% to 9% of U.S. coffee drinking households, management and investors remain giddy on growth prospects: The share price of its common stock has soared more than 230% in the last year. Ergo, elevated financial leverage is viewed as a necessary evil.

From coffee to tea, cider and cocoa

Chief Executive Larry Blanford told analysts at a William Blair “Growth Stock” conference last month, too, that the company has plans for broadening capacity output: leveraging its installed Keurig-user base to sample and adopt other beverage offerings, from iced coffees and teas to hot apple ciders and cocoa. Two additional plants are expected to come online in 2012. These initiatives will require millions more in capital — lofty ambitions for a company with only $35 million in cash. (A recent stock offering that raised some $680 million is being used to refinance and pay down some of the debt associated with the Van Houtte purchase.)

Given incessant need for growth capital, expect more debt to be issued and more red ink to flow. Trailing 12-month free cash flow was a negative $114 million.

The company’s rapid growth has exposed disturbing internal weaknesses in financial accounting. In fact, every financial report issued by Green Mountain and certified by PricewaterhouseCoopers from 2007 to 2010 had to be restated because of accounting errors (such as, overstatements of income!). Well-known corporate gadfly (and the “reformed” convicted felon) Sam Antar is also calling into question current earnings performance and management credibility, believing recent quarterly earnings received an artificial boost from a reversal of sales return reserves.

Notwithstanding legitimate transparency concerns, closer scrutiny of the company’s balance sheet also suggests cash flow isn’t the only metric conspicuously absent from alleged profitability gains: In the last six months, shareholder equity has soared 49.4% to $1.04 billion. Most of these gains, however, resulted from issuance of new stock — not from additions to retained earnings.

Protective retail-distribution deals

In recent months, Green Mountain has thwarted potential competitive threats to its leadership position in the single-serve coffee business by signing retail distribution deals with nationally recognized brands like Dunkin Donuts and Starbucks (NASDAQ: SBUX), which signed a marketing deal in March to become the exclusive purveyor of super-premium coffees available for purchase in K-cup cartridges.

As of last month, the few national brands that hadn’t partnered with Green Mountain included just Maxwell House, owned by Kraft Foods (NYSE: KFT), and Peet’s Coffee (NASDAQ: PEET). A deal with Maxwell House remains unlikely, given Kraft manufactures a rival, the aforementioned single-cup brewer system, called Tassimo.

Key patents set to expire

Green Mountain’s key retail partnerships could unravel next year, when two key patents (such as coffee filter design) for the K-cup expire. For example, Green Mountain’s agreement with Starbuck’s provides exclusivity as the “super-premium” brand for Keurig.

But it still allows the Seattle-based java king to sign distribution single-cup deals with other competitors, such as the Flavia beverage system (manufactured by Mars), Sara Lee‘s (NYSE: SLE) Senseo system, or Nestle‘s Nespresso. Starbuck’s chief executive Howard Schultz has publicly opined in the past that his company would likely look to develop and sell its own single-cup brewer.

Additionally, Stifel Nicolaus analyst Mark S. Astrachan cautioned investment banking client investors  recently that new sales data suggests Green Mountain’s own branded coffees are losing single-serve share to J.M. Smucker’s (NYSE: SJM) Folgers. Astrachan presciently warned, too, that share losses could accelerate in coming quarters as beverage drinkers grow more familiar with K-cup offerings from Dunkin Donuts and Starbucks.

The increasing likelihood of direct competition to its Keurig-brewed technology and the incessant demand for more working capital — combined with an inability to successfully differentiate its own branded specialty coffees — suggest the only green this coffee roaster will see in its future is coffee beans — not profits.

Written exclusively for 24/7 Wall St. by David Phillips. Phillips has more than 25 years’ experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog, the 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, CBS News, The International Herald Tribune, Investor’s Business Daily, Kiplinger’s Personal Finance, and The Wall Street Journal.

American Eagle Outfitters, Inc. (NYSE: AEO) Raised to Positive at Susquehanna.
Apple Inc. (NASDAQ: AAPL) Reiterated Outperform and $500 target at Credit Suisse.
AMR Corporation (NYSE: AMR) Raised to Overweight at JPMorgan.
EnerNOC, Inc. (NASDAQ: ENOC) Raised to Outperform at Credit Suisse.
Ford Motor Co. (NYSE: F) Raised to Buy at Citigroup.
Intel Corporation (NASDAQ: INTC) Reiterated Outperform on Focus List at Credit Suisse.
j2 Global Communications (NASDAQ: JCOM) Raised to Outperform as Bull of the Day at Zacks.
JetBlue Airways Corporation (NASDAQ: JBLU) Raised to Overweight at JPMorgan.
Mastercard Inc. (NYSE: MA) Reiterated Buy and raised target to $325 at Argus.
MGM Resorts International (NYSE: MGM) Raised to Buy at Jefferies.
NII Holdings Inc. (NASDAQ: NIHD) Raised to Neutral at Credit Suisse.
PetMed Express (NASDAQ: PETS) Maintained Underperform as Bear of the Day at Zacks.
Sara Lee Corp. (NYSE: SLE) Raised to Overweight at JPMorgan.
Turkcell Iletisim Hizmetleri AS (NYSE: TKC) Cut to Sell at Goldman Sachs.

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JON C. OGG