Did Green Mountain Coffee Roasters Deserve a 50% Pop From Pop?

A closer look at the numbers from Green Mountain Coffee Roasters, Sodastream, and Coca-Cola reveal some interesting insights.

Feb 10, 2014 at 2:18PM

In a joint announcement between Green Mountain Coffee Roasters (NASDAQ:GMCR) Coca-Cola (NYSE:KO), the two companies announced they will be working on a Coke-branded single-service cold beverage dispenser much like the K-cup coffee design already in use. The idea sounds nothing short of genius for both companies, but it's hard to imagine the deal for Green Mountain alone is worth nearly $7 billion or around 9 times the value of the entire SodaStream (NASDAQ:SODA) company.

SodaStream valuation
SodaStream had $562 million in sales last year. On a good day, SodaStream trades at a $1 billion market cap, or a little more than two times sales. Using this same multiple, Green Mountain would have to net $3.5 billion in revenue for its share of the joint venture, not even including whatever royalty or otherwise Coca-Cola gets.

The U.S. soda market has been in decline for more than eight years. Still, at $28.7 billion last year, it is rather big; however, it's tough to imagine that Green Mountain and Coca-Cola will have a market so large that it's equal to well more than 10% of the entire US market for at-home beverages. If the market proves to be of any material size at all for Coca-Cola, you can be sure PepsiCo (NYSE:PEP) will be right behind with its own machine, possibly partnering with Starbucks or SodaStream, further dividing the market. Considering this deal isn't expected to be launched until sometime in fiscal 2015, PepsiCo has been given a decent warning to get cracking on its own device.

Wake up and smell the coffee
Considering that Green Mountain is expecting to generate less than $5 billion in sales this fiscal year, it seems nearly impossible for its soda venture to generate sales on par with its coffee business. Let's face it, coffee is one of the first things people "need" and fast in the morning. They want it hot and fresh. The pre-K-cup method was always a pain in the butt that took time, effort, and ended up with a lot of stale, bitter coffee. The K-cup solved that problem. The single-serve soda cup, however, is neat, but it is probably not a "must have" for most people. Pouring out of our $1 to $1.50 bottles is just fine for most of us. Besides, the single-serve soda pop, unlike coffee, has already been around for decades.   

Still, don't get me wrong--there is no doubt that the news is good. It will likely add a material amount of sales and profits to Green Mountain Coffee, which is very important--especially if its coffee business starts showing negative growth (last quarter showed very little growth at all). For Coca-Cola, any exposure into people's lives is always a good thing, as it's a branding company. The more Coke invades people's homes the more it will get in people's heads that "Coke is it," and they'll continue to ask for it by name everywhere. If nothing else, the partnership stopped PepsiCo from joining forces with Green Mountain first.

Foolish final thoughts
Prior to the announcement of this deal and based on company guidance, Green Mountain traded at around 20-22 times fiscal 2014 earnings. With growth getting much slower than earlier years and competition escalating among K-cup suppliers, the pre-Coca-Cola-deal price may have been a bit too rich. It's simply impossible for management to really know the future of their K-cup sales a year out when the trends could turn on a dime (as well as the market prices for K-cups).

The Coca-Cola deal offers a speculative dynamic that should contribute and would justify the $80 or so prior share price by adding a growth product to help hopefully replace the risk of a weakening coffee market. At $100 or $120, though, cautious Fools should consider waiting for the stock to fall back down to planet Earth.

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Green Mountain Coffee Roasters, PepsiCo, and SodaStream. The Motley Fool owns shares of Coca-Cola, PepsiCo, and SodaStream. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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