Green Mountain and Coke Can't Save Each Other

Something funny happened after Coca-Cola  (NYSE: KO  ) reported earnings Tuesday morning. Not surprisingly, shares of the beverage giant slipped 3.8% as sales disappointed, but its new partner, Green Mountain Coffee Roasters  (NASDAQ: GMCR  ) , actually jumped 3.7%. Investors seem to think Coke's struggles are good news for Green Mountain and the soon-to-come Keurig Cold home-brewing machine. Before we examine that bizarre response, let's take a step back and examine Coke's recent numbers.

About that quarter
Coke's near-4% drop was the stock's biggest slide in seven months, an unusually large swing for the formidable and generally stable beverage giant. Volume sales troubles spooked the market as revenue of $11.04 billion missed estimates of $11.31 billion, but earnings per share matched expectations at $0.46. Overall volume rose 1%, but fell by the same amount in North America as Coke's domestic problems only seem to be getting worse. CEO Muhtar Kent said 2013 was "marked by macroeconomic challenges" in many parts of the world as growth in developing countries outpaced that in developed ones. Volume improved 1% in Europe, but fell 1% in North America. Kent said that region "continued to be a challenging external environment," most notably seen in sparkling beverage volume falling 3%.

Soda consumption isn't just Coke's problem. It has declined industrywide in North America for the past several years as healthier lifestyle trends and greater awareness about the effects of sugary beverages have led consumers to seek alternatives. 

Coke's drop makes Green Mountain pop?
Oddly enough, investors saw the mirror image of Coke's 4% drop reflected in its new partner Green Mountain, whose shares moved up nearly 4% Tuesday. Do investors see Coke's pain as Green Mountain's gain?

Shares of the Keurig maker exploded two weeks ago after Coke took a 10% stake in the company, and also agreed to provide its entire brand portfolio for the upcoming Keurig Cold brewing system, which is due out in 2015. Investors seem to think that sluggish sales Coke's seen through traditional channels mean it will work harder to ensure the success of the Keurig Cold, but that appears to be flawed logic. Coke sales aren't suffering because of distribution problems or accessibility. Coke is suffering because consumer tastes have changed. Sugary beverages are falling out of favor, and the beverage market has been flooded with new options such as energy drinks. Its partnership with Green Mountain will add incremental sales, but slowing Coke sales are now a problem for the Keurig maker, not a boon. As demand for Coke falls, so will demand for the Keurig Cold, and perhaps more important, its appeal -- and that is a dangerous prospect for Green Mountain, especially when the stock is trading at a P/E of 38 with little organic growth. 

Ice-cold stocks
Green Mountain shares spiked on news of the deal, having gained 50% since the announcement, but that jump seems exaggerated after a closer look. That increase equates to a $6 billion uptick in market cap, meaning the market attributes that much value to Coke's investment. By comparison, SodaStream International  (NASDAQ: SODA  ) , far and away the market leader in DIY soda, is worth just $844 million, or just about one-seventh of the Keurig Cold's price tag. SodaStream has been one of the market's most shorted stocks on the market during its brief time as a public entity, proof of Wall Street's skepticism for the countertop soda movement. Coke's investment should lend some respect to the burgeoning industry, but SodaStream shares didn't get the same spark as Green Mountain's.

Is the Keurig Cold, which won't even hit the market until 2015, worth seven times the SodaStream? Keep in mind that SodaStream is set to sell about 4 million starter kits this year and see 17% growth next year. Sales for the high-priced Green Mountain, meanwhile, are only expected to grow 7% this year and 11% the next, once the cold-brewing machine comes out. Either Green Mountain sells 20 million Keurig Cold machines in its first year on the market, or the stock will come down from its current lofty levels.

Prospects for Coke stock don't seem much better after its latest earnings report, and major foreign-currency headwinds are expected for the coming year. Shares have also been flat over the past year even as the broad market has jumped.

With the spike in Green Mountain shares looking exaggerated and Coke sales flatlining, both of these stocks could turn out to be duds for investors. After its latest earnings report, it looks like Coke won't be Green Mountain's savior. But changing consumer preferences also mean the Keurig maker won't solve the beverage giant's problems either. 

One stock that's ready to take off
Green Mountain got off to a strong start this year, but our chief investment officer has found a different stock he likes for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


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