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.

The war for your kitchen isn't nearly as lucrative as the war for your living room
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.

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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information