Seeking Alpha
Research analyst, long/short equity, tech
Profile| Send Message|
( followers)  

Quick Take

  • Green Mountain struck a deal with Unilever, which will soon make Lipton teas available in K-Cups and Vue packs.
  • Such deals could help lift the Vue sales as there aren’t too many third party products that are compatible with the machine right now

Green Mountain Coffee Roasters (NASDAQ:GMCR) has entered an agreement with Unilever, which will make Lipton cold and hot teas available in K-Cups and Vue packs [Green Mountain Shares Up As It Brews Global Tea Deal, March 7, 2013, investors.com]. The deal could help lift the sales of Vue brewers in particular, which haven’t really grown as much as the company would have liked. Vue machines managed to generate sales of around $19 million in the previous quarter [Green Mountain Falls as Sales Forecast Trails Estimates, February 8, 2013, bloomberg.com]. The stock jumped 3% after the announcement of the Lipton deal and crossed $50 for the first time in nearly a year.

If Vue brewers were to replicate the success of the traditional single-cup brewers, they need to be compatible with a large variety of beverages, or else its sales will be limited to coffee aficionados who don’t care about the higher retail price. The company realizes that the high tag price acts as an impediment for potential customers, and consequently decided to lower the entry point of the Vue brewers by introducing the new V500 at an SRP of $170 recently [Green Mountain Coffee Roasters, Inc. Expands the Keurig Vue Series, Adding the Vue V500 Brewing System, February 28, 2013, marketwatch.com].

How Does The Deal Help GMCR?

Besides Unilever, Green Mountain also has a deal with Dr Pepper Snapple (NYSE:DPS), to make available the latter’s iced teas in K-Cups and Vue packs, beginning this summer. If Green Mountain’s agreement with Unilever could spark several other such deals, then we could have meaningful upside to our current valuation.

Deals like these set up a positive feedback loop. Greater availability of private labels and third party companies will only enhance the adoption rate of Vue brewers. And higher the Vue sales, then higher would be the number of third party labels wanting to forge an agreement with Green Mountain. Besides selling more brewers, the company’s royalty revenues will get a boost as well.

Two of Green Mountain’s patents expired in September last year, which opened the doors for private labels to introduce their own K-Cups without having any obligation to pay royalty to the company. However, Vue uses a different technology for which it still holds the patent, and therefore any private company looking to introduce its own Vue packs will still need to pay royalty to Green Mountain.

We have a $36 price estimate for Green Mountain Coffee Roast, which is about 30% below the current market price.

Disclosure: No positions

Source: Green Mountain's Unilever Tea Deal Could Spur Vue Sales And More Deals