Irrational investors often react on a single news event, increasing the volatility of a company's share price. Recently, Coca-Cola (NYSE:KO) announced a $1.2 billion investment in Green Mountain Coffee Roasters (NASDAQ:GMCR), making Green Mountain Coffee's share price soar by more than 25% last Thursday.
At first, the general market thought the deal could hinder the potential future growth of SodaStream's (NASDAQ:SODA) at-home soda-maker system. Thus, SodaStream plummeted after the deal announcement. The stock, however, bounced right back after investors took a second look at what the Coca-Cola and Green Mountain deal really means.
A good deal for both Coca-Cola and Green Mountain Coffee Roasters
Coca-Cola has decided to sign a 10-year agreement with Green Mountain to develop its brand portfolio for use in the Keurig Cold at-home beverage system. To solidify the long-term relationship, Coca-Cola will purchase a 10% stake in Green Mountain, equivalent to nearly 16.7 million newly issued shares of Green Mountain. The total investment is worth $1.2 billion. Muhtar Kent, Coca-Cola's chairman and CEO, commented that both companies would experience significant growth by "pairing [Coca-Cola's] brand leadership and global footprint with [Green Mountain Coffee Roasters']innovative technology."
Indeed, this new partnership and investment will help Coca-Cola reach its 2020 vision to double system revenue by 2020 and more than double the company's servings to 3 billion plus a day. It will also allow Coca-Cola to tap into the fast growing single-serve, pod-based segment of the cold-beverage business. For Green Mountain, it will use the amount invested by Coca-Cola to return cash to shareholders via a share-repurchase program and expand its Keurig Cold beverage system in the next several years.
The deal might actually benefit SodaStream
Currently, in the do-it-yourself, or DIY, soda-system market, SodaStream is still the leader. However, it has only successfully tapped into 1% of U.S. households so far compared to as much as 25% in Sweden. Thus, there is plenty of future growth for SodaStream. Coca-Cola entered the market by partnering and investing in Green Mountain. SodaStream will have a big competitor with huge distribution power and a global brand footprint. Many investors might think of the recent partnership as a challenge for SodaStream, but in another aspect, it could help broaden the overall market for the DIY soda-system industry.
While Coca-Cola is stepping its foot into the single-serve, cold-beverage industry, it is also rational for its global head-to-head competitor, PepsiCo, to enter the field as well. Previously, there was a rumor that PepsiCo was in talks to acquire SodaStream, but PepsiCo denied that rumor. With Coca-Cola's recent move, PepsiCo might now be interested in buying out SodaStream.
Due to all of the facts covered in this article, Sodastream appears to be an excellent candidate to provide Foolish investors above average returns even if PepsiCo does not acquire them. This is thanks to the company's high historic growth rate, potential market size, know-how, and its market leadership in the at-home soda-maker system business. At the current price, investors are buying a name-brand company growing at around 20% annually for under 18 times forward earnings.
Anh HOANG owns shares of SodaStream. 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.