A Few Reasons Why Keurig Green Mountain Will Continue Outperforming

Aug.31.14 | About: Keurig Green (GMCR)


Keurig Green Mountain reported mixed results last time, but investors should look at its long-term prospects.

Keurig's partnerships with the likes of Coca-Cola and Kraft will help it penetrate more markets going forward.

Keurig is also focusing on innovation and is on track to launch new brewing systems going forward.

Keurig's valuation and earnings growth projections also seem impressive, indicating long-term growth.

Keurig Green Mountain's (NASDAQ:GMCR) performance in 2014 has been outstanding. The company has appreciated more than 75% so far on the back of its growth and key partnerships with companies such as Coca-Cola (NYSE:KO) and Kraft Foods (KRFT).

However, when Keurig reported its third-quarter results, it failed to appease Wall Street despite delivering year over year growth. The company's profits improved substantially on account of growth in revenue, productivity, and operational improvements. But, at the same time, it projected a weak outlook. However, Keurig has a lot of tailwinds, which make its future prospects attractive.

A closer look at the results

The company is already seeing good traction, as evidenced by revenue growth of 6% in the previous quarter to $967 million, which was below the $1.04 billion estimate. In addition, its earnings rose to $0. 94per share from $0.76 per share last year, topping the consensus estimate of $0.87 per share.

Its revenue for the quarter rose around 6% to $1.02 billion from a year ago period of $967.1 million, but failed to meet the street expectation of $1.04 billion. On the other hand its earnings rose to $0.94 per share as compared to $0.76 per share last year, and even topped analyst estimates of $0.87 per share.

Impressive moves for the future

Now, Keurig's revenue in the previous quarter fell behind estimates because of a one-time event. Its revenue came at the lower end of its guidance due to the impact of shipment timings of its portion packs. But, management is confident of a better performance in the fourth quarter, driven by two key drivers. First, there has been significant growth in Keurig's installed base, which is in line with its expectations. Second, the company has partnered with various brands such as Target (NYSE:TGT), Harris Teeter, and various others for distribution of its products.

Recently, the company partnered with Kraft Foods to make Maxwell House and McDonald's McCafe pods for the new Keurig 2.0 brewer. It also joined hands with Subway, and installed its Keurig single-serve solution at around 20,000 Subway locations. This will benefit both companies. On one hand, Subway will benefit from cost efficiency, an increase in beverage freshness, and wider varieties, while on the other, Keurig will be able to tap more distribution points. Looking ahead, management expects more such food joints and restaurants to install its coffee solution.

More catalysts to consider

Keurig is also focusing on innovation to sustain its momentum. The K cup maker is gearing up for the upcoming holiday season with the launch of its Keurig 2.0 hot beverage system, along with the transition of its portion packs to the new 2.0 system. As such, the company is working hard to increase the production of its brewers, and has even started shipping them.

The company is optimistic about its new Keurig 2.0 system, and it has increased the breadth of its product mix to provide consumers with even broader choice and variety. Keurig is also preparing to launch its cold systems by the next fiscal year. For this, it has already bought a $585,000 site in Lithia Springs, Georgia.

Keurig's partnership with Coca-Cola will add strength to its portfolio in this segment. Earlier this year, Coca-Cola and Keurig entered into a deal to sell Coca-Cola's products in single-serve pods. Now, this will add a variety of options to Keurig's upcoming cold system. As per CNN Money:

"The firms will collaborate over the next 10 years to produce Coca-Cola products in single-serving plastic pods, also known as K-Cups, for use with Green Mountain's forthcoming Keurig Cold at-home beverage system. As part of the deal, Coca-Cola is paying $1.25 billion for a 10% stake in Green Mountain, and will help market the new product.

The Keurig Cold system will be likely be released in late 2014 or 2015. It will dispense cold beverages "including carbonated drinks, enhanced waters, juice drinks, sports drinks and teas," the companies said in a joint statement."

Moreover, Coca-Cola gave its vote of confidence to Keurig's upcoming system when it increased its stake in the company to 16% earlier this year. Considering Coca-Cola's brand image, this deal will allow Keurig to increase its penetration.

Progress in licensing

In addition, Keurig has made substantial progress in licensing. Management says, "We are very pleased with the progress we are making in adding previously unlicensed brands to the Keurig system. We are now seeing unlicensed share flattened out and begin to decline as we have started shipping newly licensed packs including, Peet's and Archer Farms among others. "

It has also introduced new license partners such as BJ's Wholesale Club, Harris Teeter, Nestlé, among others. Keurig's focus on technological innovation to create new platforms for incremental growth opportunities has attracted these companies toward it. Looking ahead, Keurig anticipates a potential increase in the share of both owned and licensed brands in the coming months. Keurig is also focused on international expansion, and launched its hot system in the U.K. this year.

A risk to consider

But, Keurig also faces some headwinds. According to Reuters, coffee prices are extremely volatile. To add to this challenging environment, an unexpected drought in Brazil during the month of January and February have nearly doubled the arabica coffee futures prices within a span of three months. Thus, to deal with this issue, Keurig has booked coffee prices for the next three quarters.

According to Fran Rathke, Chief Financial Officer, Keurig Green Mountain, "We've got essentially the first three-quarters locked out and each one of those quarters will be at higher coffee input costs than the prior year quarter. The benefit from lower coffee costs in fourth quarter will be less favorable than year-to-date trends." This is one of the challenges that the company has to face in the coming months, but it seems that it has taken the right initiatives to tackle this situation


Keurig currently has a trailing P/E of 38.21, which is quite expensive as compared to the industry P/E of 25.9. But, it has an improved forward P/E of 33.14, which is a sign of improved earnings performance. Moreover, with its earnings expected to grow at an impressive rate of 16% for the next five years, investors should look beyond Keurig's sluggish performance last quarter, as the company looks well-positioned for long-term growth.

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