The Keurig Green Mountain-Coca-Cola Partnership Has Been Blown Way Out of Proportion

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

News of the partnership between Coca-Cola (NYSE: KO  ) and Keurig Green Mountain (NASDAQ: GMCR  ) sent the latter's stock price soaring. Within a week of the announcement, Green Mountain's stock price was 50% higher than it was before the news become public – a stunning $6 billion surge in its market valuation.

The company's stock has retreated somewhat since the announcement, but still remains at a much higher level than its pre-partnership valuation. Although Coca-Cola's commitment is undoubtedly beneficial for Green Mountain, one has to wonder if a not-yet-launched at-home carbonation system is really worth the billions that the market is attributing to it.

Exciting prospects
First, the good news. SodaStream (NASDAQ: SODA  ) estimates that the U.S. at-home soda market could potentially be worth $40 billion – that's if it reaches 100 million U.S. households. However, even if the market only realizes a quarter of that potential, it will grow as large as the at-home coffee market is today. That represents an enormous opportunity for Green Mountain as it launches its new at-home carbonation system.

Moreover, SodaStream's U.S. household penetration is at 1% just a few years after its entry into the market. It hopes to eventually achieve 10% household penetration. If the at-home carbonation market reaches its full potential – 100 million out of 115 million U.S. households and $40 billion in revenue – and if Green Mountain captures a 20% share of that market, the opportunity will give it $8 billion in additional revenue.

Moreover, if Green Mountain achieves a 50% gross margin (similar to that of SodaStream) and pays its beverage partners a 25% revenue royalty, then at-home carbonation will generate $3 billion in annual earnings for Green Mountain – or $17.83 earnings per share. That's more than four times the company's current earnings per share.

This sounds like an amazing opportunity for Green Mountain. So what is there to gripe about?

Still in its infancy
Green Mountain's stock now trades for $4.9 billion more than it did before the announcement, after adjusting for the $1.25 billion in cash from Coca-Cola's equity purchase.

Even though the potential annual earnings are a massive $3 billion, the opportunity may not be worth $4.9 billion. It will take many years to reach the $3 billion in earnings – if it ever comes at all. To figure out what it might be worth, I put together a few assumptions. The first assumption is that Keurig Cold matches SodaStream's current household penetration rate in its first year on the market – and continues to penetrate an additional 1% of households each year through 2024.

Author projects 1% household penetration in 2015, increasing by 1 percentage point each year through 2024

The second assumption is that Keurig Cold's revenue per household matches that of SodaStream in the first year, but increases at a rate of 10% per year thereafter. In 2012, SodaStream served 6 million active customers and generated $436 million in sales. That's close to $73 in revenue per household. Let's assume Keurig Cold can start by generated $75 in revenue per household and then increase that rate by 10% each year.

At 1% household penetration, Keurig Cold would be in about 115,000 U.S. households. At $75 in revenue per household, it would generate $86 million in revenue. After deducting a 25% royalty to beverage suppliers (Coca-Cola and other brands) and assuming a 50% gross margin, the gross profit in year one would be $32 million. That's only $0.19 per share. If all of the assumptions hold – add one percentage point market penetration per year, 10% increase in revenue per household, 25% brand royalties, and 50% gross margin – Keurig Cold will earn $4.43 per share in 2024.

Author's projections

Author's projections. Assumes 168.3 million shares outstanding.

After adjusting for Coca-Cola's $1.25 billion investment, Green Mountain's stock price was $80.27 before the deal was announced. The company's stock now trades near $108 per share – roughly $28 per share higher as a result of the Coca-Cola partnership. If all goes according to plan, Keurig Cold will generate $1.86 earnings per share in 2020 and $4.53 earnings per share in 2024. That means the market is pricing the opportunity at 15 times potential 2020 earnings and 6 times potential earnings 10 years from today.

You can quibble with my projections – although bullish, there is room for even more optimism – and you can argue that the stock was undervalued before the announcement. Still, the point remains the same: the market is forcing investors to pay for future growth that will take many years to materialize, if it ever materializes at all.

Some investors make a living off of that kind of investing, but few can do it profitably over the long run. For now, it appears that Green Mountain's stock price has gotten ahead of the business. Investors beware.

Growth stocks you can count on
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 19, 2014, at 12:02 PM, Pancakes22 wrote:

    You really think the cold can achieve 1.5-2% market penetration in only one year when it has taken Sodastream 3 years to get that same number?

    Please elaborate, especially since your all about "comparing the two companies"

  • Report this Comment On March 20, 2014, at 10:43 AM, twcooper wrote:


    I took a skeptical stance in the article. That is, I don't think the market opportunity is as amazing as it is made out to be. As such, I wanted to show that, even with assuming decent market penetration, the opportunity still was not as incredible as the market has priced it.

    Here was my conclusion:

    "the market is forcing investors to pay for future growth that will take many years to materialize, if it ever materializes at all."

  • Report this Comment On March 26, 2014, at 10:29 PM, stockdissector wrote:

    It is definitely overblown. I don't see people mixing sodas at home at any decent level when they just buy it already made for home consumption. By contrast, cofee and other hot beverages almost always requires some preparation at home and that is where the current Keurig models add utility.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2875700, ~/Articles/ArticleHandler.aspx, 9/1/2015 10:32:12 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Ted Cooper

Ted Cooper is a value investor based in Texas. He does not ride a horse to work.

Today's Market

updated 1 hour ago Sponsored by:
DOW 16,058.35 -469.68 -2.84%
S&P 500 1,913.85 -58.33 -2.96%
NASD 4,636.11 -140.40 -2.94%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/1/2015 3:59 PM
GMCR $55.10 Down -1.50 -2.65%
Keurig Green Mount… CAPS Rating: **
KO $38.75 Down -0.57 -1.45%
Coca-Cola CAPS Rating: ****
SODA $14.37 Down -0.87 -5.71%
SodaStream CAPS Rating: **