Keurig Green Mountain (NASDAQ:GMCR) is set report earnings for its third fiscal quarter after the market closes on Wednesday, August 5th. Contributing analysts on crowdsourced earnings estimates platform Estimize.com see profits increasing to 94 cents per share this quarter, up from 82 cents in the same period of last year. However, the rate of year over year growth is expected to slide to just 6%, in large part due to a battle over coffee pod supremacy.
Keurig's patent on its K-Cup coffee pods expired back in 2012, allowed unlicensed competitors to enter the single serving coffee market. This fall Keurig is preparing to release the Terminator of single cup coffee systems to wipe out its competition, the Keurig 2.0.
The introduction of cheaper, competitive pods on the Keurig system has caused earnings to slide in 3 consecutive quarters. A drought in Brazil, the world's largest supplier of coffee, and a coffee eating fungus in Central America have not helped Keurig maintain margins either. As a result of diminished supply coffee prices are up, which has pressured Keurig Green Mountain's margins. It's not all doom and gloom at Keurig though, profits have been consistently increasing, even if at a decaying pace.
The Keurig 2.0 machine could be just the ticket to rejuvenate profit growth, if two critical conditions are met.
- Consumers need to purchase the new device: The 2.0 model will allow java heads to finally brew a full pot of coffee. This is a long awaited upgrade for coffee drinkers who previously had to wait to get their fixing one cup at a time on first generation models. However the new device will come with a $189 pricetag, and coffee drinkers with the older models may not all choose to upgrade to the new device. There is some concern that the single serving coffee market may already be deeply penetrated.
- New technologies that Keurig is throwing into the 2.0 need to succeed in keeping competitors off its platform. Keurig is attempting to dig a deep moat around its new model, even integrating a camera to prevent unlicensed pods from functioning in the Keurig 2.0. Sam Reed, the CEO of Treehouse Foods (NYSE:THS), thinks he can crack the code on the Keurig 2.0's right management technology within a year. Keurig will need to protect its exclusivity on the 2.0 to realize the full potential of earnings growth that the device could drive.
As previously mentioned the Keurig 2.0 is scheduled to be released this fall. For now, earnings growth will continue to grind lower, but buy side and independent analysts on Estimize still expect Keurig to perform much better than the sell side's consensus.
On Wednesday contributing analysts on Estimize are expecting Keurig Green Mountain to beat the Wall Street earnings consensus by 7c (8%) per share and top the Street's revenue consensus by $23 million (2%). Green Mountain has breezed past the Street's EPS consensus in each of the past 8 quarters. Analysts on Estimize expect the coffee pod company to do it again this time.
As the rate of earnings growth continues to gradually approach 0, pressure is mounting for the Keurig 2.0 to become the coffee pod monopoly establisher that Green Mountain needs it to be. With the rate of year over year profit expansion expected to trickle to just 6% this quarter, it looks the Keurig 2.0 will be launched just in the nick of time to get investors excited again. All Keurig needs to do is sell the 2.0 and ensure that its new rights management technology can keep imitators out.