News out today sees Snapple (DPS) flavors coming in K-Cup and Vue pack form to the popular Keurig brewing system owned by Green Mountain Coffee Roasters (GMCR). The move links Snapple's teas with the easy to use Keurig brewers.
Beginning in Spring of 2013, consumers will be able to purchase K-Cups featuring Snapple brands in the United States and Canada. Lawrence J. Blanford, the Chief Executive Officer of Green Mountain Coffee Roasters, had this to say about the partnership, "Were happy to welcome Snapple to our family of Keurig brewed iced beverages, a leader in the premium ready to drink tea category."
The move to bring tea brands to Keurigs could be setting up for a long term goal of carbonated beverages. Dr. Pepper could be a huge winner over Coca-Cola (KO) and Pepsi (PEP) in the long term. An early partnership with Green Mountain for Snapple could bring Dr. Pepper, Sunkist, A&W, and other Dr. Pepper brands to the at home market sooner. Sodastream (SODA) has been increasing its market share in the at home beverage market. Several new machines coming out target both coffee and carbonated beverages. Sodastream competes directly against the big pop makers like Coca-Cola, Pepsi, and Dr. Pepper. Green Mountain may have the better plan as it could sell a large number of branded K-Cups in the carbonated market.
Green Mountain Coffee shares have been hit hard this year as competition heats up. Bunn has a home version called MyCafe that will work with K-Cups. The machine will retail for $159.99 and be available at Lowe's (LOW), Bon-Ton, and Dillard's stores. Esio Beverage Co. is making a machine that will be sold in Wal-Mart (WMT) stores. The Esio machine already has strong partnerships with Maxwell House, V8 Splash, Diet Brisk iced teas, Country Time Lemonade, and Crystal Light drinks. Esio's CEO said sodas were on the radar and could be coming soon. Starbucks recently came out with its own Verismo at home brewing machine. The Verismo is currently for sale online and will expand to Starbucks stores in the coming months. Private label offerings from Safeway (SWY) and Supervalu (SVU) are cutting into all the premium brewing margins. Along with at home brewing options, I recently wrote about McDonald's selling its coffee beans in retail stores, adding another player in the game.
Green Mountain has lowered the price of several of its at home brewers and now sees retail prices between $90 and $200. Many of the machines are sold at cost as the company operates the razor blade method of counting on refill sales. The K-Cups are what the company earns profits on. Green Mountain is counting on strong customer loyalty from key brands it has including: Dunkin' Donuts (DNKN) and Caribou Coffee (CBOU). Keybanc called the move significant today and will likely issue a new upgrade to shares in the coming weeks. Other analysts could be out with buy ratings on both Green Mountain and Dr. Pepper as the partnership really benefits both.
Snapple was founded in 1972 and is now a part of the Dr. Pepper Snapple Group. Valuation of Snapple has fluctuated as the company has been bought and sold several times. Quaker Oats bought Snapple back in 1994 for $1.7 billion. The company was later sold to Triarc for $300 million. In 2000, Triarc sold the Snapple brand to Cadbury Schweppes for $1.45 billion. In 2008, the company was spun off from Cadbury along with the Dr. Pepper and other beverage brands.
In the second quarter, Dr. Pepper Snapple Group saw volume of the Snapple brand rise 1%. Distribution for Snapple in grocery stores and convenience stores rose by 6.3 and 6.9 points respectively. In 2011, Snapple volume increase 7%, and represented the biggest gainer in the entire Dr. Pepper portfolio. For the fiscal year, Dr. Pepper Snapple Group is forecasting earnings per share of $2.90 to $2.98. K-Cup sales of Snapple will begin selling in 2013 and should raise earnings per share targets for next fiscal year.
Shares of Green Mountain Coffee Roasters have been on quite the slide this year. Today shares get a 2% lift from Snapple news, but still trade down over 50% on the calendar year. Over the last fifty two weeks, shares are down 75%. The company reports quarterly earnings on November 5th. For the quarter, analysts expect the company to earn $0.48. For the fiscal year, analysts on Yahoo Finance see Green Mountain posting earnings per share of $2.24. In 2013, analysts see earnings per share of $2.51. With shares currently sitting at $23.07, shares are trading at around ten time current earnings, and less than ten times next year's earnings. Competition is heating up in the at home brewing sector, but shares of Green Mountain should not be this cheap. Consider initiating a long position now.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GMCR over the next 72 hours.