Coca-Cola Gets More Caffeinated

Soft drink giant Coca-Cola has increased its stake in Keurig Green Mountain for growth--but will its plan work?

May 23, 2014 at 9:06AM

Coca-Cola (NYSE:KO) has a problem. It seems that people are not consuming as many sugary soft drinks as they used to, and as a result the beverage giant hasn't been performing as well as management and investors would have liked. So the Atlanta-based company will try to improve things by increasing its stake in Keurig Green Mountain (NASDAQ:GMCR) from 10% to 16%, and it will spend more than a billion dollars to do so. 

Is this a wise move for the 128-year-old company? How will this impact Keurig and its investors? How will Coca-Cola's competitors react to the news?

Soft drinks down
Revenue and earnings per share at Coke have been flat over the past couple of years. Consumers might have become more health-conscious or they may not have as much cash to spend now because the labor market is terrible and the economy has been relatively stagnant since the recession of 2008-2009 ended. 

KO Revenue (TTM) Chart

KO Revenue (TTM) data by YCharts

For whatever reason, consumption of carbonated soft drinks, Coke's bread and butter, peaked in 1998 and has been generally declining since then. Consumption of healthier beverages, like bottled water and non-carbonated drinks, seems to have peaked but at least it has not declined. 

Images

Source: NeoGaf 

What about coffee?
Although coffee drinking has been on the decline as well, probably because of the currently less-than-robust economic growth, consumption at home is rising and Keurig,  which provides single-serve, home-brew machines, has flourished. The company has grown its revenue sixfold and its earnings per share by more than eight times over the last half decade. The stock followed suit, appreciating by 575%.

Coca-Cola probably wants to duplicate that success. Until that happens investors might have to be patient and ride out the storm with dividends. The company has been bumping up its payout for the past 50 years. 

GMCR Chart

GMCR data by YCharts

Keurig investors will most likely get a short-term boost from the added capital from Coca-Cola. Over the long-term the K-cup brewer might benefit from some of the Coke maker's best traits, such as its worldwide marketing and distribution network and powerful brand name, generally regarded as one of the best around. It could be a win-win for both sides.

Do Fritos help?
How are Coca-Cola's competitors doing? It looks like PepsiCo (NYSE:PEP) is also feeling the effects of the soft spot in soft drinks. Even though it has a diversified portfolio, the company, which also owns several food brands like Frito-Lay and Quaker, has also reported flat revenue and EPS in the recent past. Pepsi probably could use a jolt of java, which is why the company might have to look for something to invest in. However, a relatively big debt to equity ratio of more than 100% could hold it back. 

PEP Revenue (TTM) Chart

PEP Revenue (TTM) data by YCharts

Foolish conclusion
Coca-Cola has decided to get more caffeinated and increase its stake in Keurig Green Mountain. With the success of K-cups and the trend toward more coffee brewing at home, the beverage giant might be able to jump-start its growth. 

Competitors like PepsiCo are also being pinched by a drop in soft-drink consumption and might have to look elsewhere to improve returns for their investors.

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Mark Morelli owns shares of Coca-Cola. The Motley Fool recommends Coca-Cola, Keurig Green Mountain, and PepsiCo. The Motley Fool owns shares of PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on 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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