Green Mountain Coffee: Should You Buy the Hype?

Is the Green Mountain Coffee Roasters and Coca-Cola deal deserving of the gains and hype it has received, or is another at-home beverage maker like SodaStream a better option?

Feb 23, 2014 at 10:00AM

Green Mountain Coffee Roasters (NASDAQ:GMCR) has soared over 45% since announcing a partnership with Coca-Cola (NYSE:KO) to exclusively produce and sell single-serve, pod-based cold beverages. While investors are betting big for this partnership to materialize, is Green Mountain still a buy for long-term Foolish investors, or is another at-home beverage company like SodaStream (NASDAQ:SODA) presenting a better opportunity?

What's the deal?
On Feb. 5, Green Mountain announced a long-term partnership with Coca-Cola, one that involved Coca-Cola buying a 10% stake in Green Mountain and a collaboration on the new Keurig machine.

This 10% stake is what led to the near 50% rally, meaning investors must expect future fundamental growth.

Here's the problem
Yet, despite the large gains and the news of this partnership, Green Mountain is still guiding for growth in the high single digits for 2014. Thus, it doesn't appear that Green Mountain expects this partnership to make much of a difference in the near term.

And why would it?

Green Mountain has 13 different beverage brands, which combined accounted for 8% growth, or $931 million, during its last quarter; 67% of total revenue. Coca-Cola is a viable partnership and long term could add substantial revenue on top of Green Mountain's current market.

However, there is a problem with this partnership; consumers already have a single-serve Coca-Cola option, and it's called 12 ounce cans. The average price of a single 12 ounce Coke in the U.S. is $0.72, while a 12 pack averages less than $4.50, or $0.37 per can. K-cups sell for $0.55, meaning K-cups are more expensive, and who knows whether the taste can be replicated at home?

Therefore, it is highly likely that this Coca-Cola partnership will have little impact for Green Mountain; and as for Coca-Cola, it still doesn't address its problem of declining U.S. sales volume.

In 2013 Coca-Cola's total revenue declined more than 1%; this was due to continued weakness in case volume, as the soft-drink industry as a whole faced problems with demand. Consumers are drinking healthier beverages, and in major cities where lots of money is being spent on health awareness, soft-drink sales are seeing even further declines.

According to the New York Post, soda sales for 2013 in New York declined 6.8%, a problem that many experts believe will trickle down into other areas of the country. Hence, this seems to be the biggest problem for Coca-Cola right now. And it's hard to imagine how this partnership with Green Mountain does anything to improve its tainted image, which can be explained in Credit Suisse's 2013 report entitled "Sugar: Consumption at a Crossroads"; it paints a very gloomy future for the beverage giant.

A better option
With that said, Green Mountain shares just jumped 45% on a partnership that may not make too much of a fundamental difference. In fact, investors might want to take a good hard look at SodaStream, a heavily shorted stock but a cheap company that's growing very fast.

SodaStream sells at-home soda machines that are marketed as being significantly healthier and more eco-friendly than Coca-Cola products. Not to mention, SodaStream is growing really fast.

SodaStream's full-year tally for revenue of $562 million and net income of $41.5 million represents top-line growth of 28% and a P/E ratio of 20.5. In comparison, Green Mountain grew less than 13% in 2013 and trades at 35 times earnings.

Looking ahead, analysts expect growth of 17% for SodaStream in 2014, which far exceeds Green Mountain's high single-digit guidance. Yet, despite SodaStream's more impressive growth, it is a much cheaper stock, meaning it likely presents lower risk and higher upside for shareholders.

Final thoughts
The confidence shown by Coca-Cola to invest in Green Mountain is unarguably enlightening. But after such large gains, it doesn't mean that Green Mountain presents the best investment opportunity looking ahead.

Instead, SodaStream looks to be the best value. And if the company can maintain its growth, it will likely soar considerably higher. But for Green Mountain, it looks like those gains have come and gone.

Wondering what Warren would do?
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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Green Mountain Coffee Roasters, and SodaStream. The Motley Fool owns shares of Coca-Cola 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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