Is Green Mountain Peaking?

Lawsuits and a downgrade are crashing the caffeinated party at Green Mountain Coffee Roasters.

Feb 12, 2014 at 3:40PM

The past few days have been scintillating for Green Mountain Coffee Roasters (NASDAQ:GMCR), but an analyst downgrade this morning and a legal swing from a familiar foe last night are icing the Keurig company down.

Last week the big news was obviously that Coca-Cola (NYSE:KO) would invest $1.25 billion for a 10% stake in Green Mountain, also striking a 10-year development deal to provide its brands as flavors for the forthcoming Keurig Cold appliance. The Coca-Cola investment was more than enough to offset an uninspiring quarterly report that showed sales continued to decelerate for Green Mountain.

The new trading week kicked off with more good news when Krispy Kreme (NYSE:KKD) inked a partnership that would find its signature Smooth and Decaf java offered up as licensed K-Cup portion packs. Krispy Kreme was a holdout a couple of years ago when some of the bigger consumer brands and coffee-intensive eateries sided with Green Mountain. 

Krispy Kreme didn't have to work with Green Mountain. The two patents protecting Green Mountain's K-Cup expired in September 2012. Anyone can offer up a Keurig refill these days. However, distribution through Keurig's preferred channels and access to the new Keurig 2.0 platform that will roll out in the fall was probably too tempting for Krispy Kreme to pass up. 

It's that new device that led TreeHouse Foods (NYSE:THS)to file a lawsuit in federal court, arguing that Green Mountain's move to redesign its brewers will block competition from putting out cheaper coffee packs. Keurig 2.0 will accept original K-Cups, but it also will offer users the option of making full pots of premium coffee with the new patent-protected K-Carafe platform. There may also be some enhancements to the original K-Cup.

TreeHouse Foods should be a familiar name to Green Mountain investors. That same company sold coffee refills for Keurig machines through the country's largest retailer four years ago. It was Green Mountain that initiated the legal fisticuffs at the time, but now it's TreeHouse Foods trying to get private labels in on the Keurig 2.0 fun. 

It's against this backdrop that Longbow Research downgraded shares of Green Mountain from buy to hold this morning. Green Mountain's valuation and scarce details on Keurig Cold outside of a fiscal 2015 release target find Longbow taking to the sidelines. It is rescinding its price target of $123 on the stock.

Things continue to get interesting for Green Mountain. Between new K-Cup partners, the fall rollout of Keurig 2.0, and the Coca-Cola-backed Keurig Cold (which could hit the market in time for the 2014 holiday season, or might be pushed back as late as the following summer), the future's not going to be dull.

Investors should expect the volatility -- and the opportunities -- to continue to brew.

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Rick Munarriz owns shares of Green Mountain Coffee Roasters. The Motley Fool recommends Coca-Cola and Green Mountain Coffee Roasters. The Motley Fool owns shares of Coca-Cola. 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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