Keurig Green Mountain (NASDAQ:GMCR) has had an exciting 2014 so far. The stock surged 40% in after-hours trading on Feb. 5 on news of its planned partnership with Coca Cola (NYSE:KO). Green Mountain's stock is now just 6% below its 52-week high and, at the rate it's been growing, it's likely to set a new high very soon. In mid-May, it jumped another 9.7% after it was announced that Coca Cola would increase its stake in the company. However, Roth Capital recently downgraded Green Mountain's rating from a solid buy to a neutral. Is this growth sustainable, or is this just a temporary spike in a company that's on its way back down?
Partnership with Coca Cola
In early February, the announcement was made that Coca Cola would buy a 10% stake in Keurig Green Mountain; this worked out to about 3.5 million shares, or $1.25 billion. The companies have also signed a 10-year agreement in which they plan to collaborate on developing and introduce Green Mountain's new Keurig Cold beverage system to a global consumer base.
According the terms of the agreement, there was the potential that Coca Cola would increase it's stake in the company by as much as another 6.5 million shares. This potential has already been partially realized, as Coca Cola bought another 2.8 million shares, increasing it's stake in the company to 16%.
Green Mountain intends to use this large cash injection from Coca Cola to fund a substantial share repurchase program valued at about $1.1 billion. It will also use the money to fund product development of the Keurig Cold beverage system.
Keurig Cold beverage system
Keurig Cold is an at-home beverage dispensing appliance very similar in design as the hot system that it already successfully sells. Under the new terms with Coca Cola, it will now dispense Coca Cola brand beverages in the form of single serve pods.
The product is similar to the one developed by PepsiCo called Spire which has already launched in a few key locations but is expected to be sold nationwide and globally soon. The two products will be in direct competition with each other.
The Coca Cola rival may also be interested in purchasing a 10%-16% stake in Green Mountain's rival SodaStream (NASDAQ:SODA) who will also feel the pressure from this Green Mountain-Coca Cola partnership. The competition will likely be a bigger obstacle for SodaStream than it is for PepsiCo.
Coca Cola has more brand recognition globally so its move with Green Mountain into the same market territory as Pepsi and SodaStream will be a substantial threat. It will likely become a neck and neck race to secure emerging markets around the globe as North American sales are declining for both.
A potentially limiting factor for Green Mountain is the exclusive nature of the contract with Coca Cola, which restricts the Keurig Cold beverage system to offering only Coca Cola products. However, Coca Cola's products are top sellers in many markets around the world. Furthermore, by partnering with Coca Cola, Green Mountain will be able to take advantage of the former's deep pockets and strong marketing skills.
But what is there for Green Mountain beyond this partnership with the food and beverage giant? A severe drought in Brazil has caused a spike in the price of coffee -- the company's main product. Prices are predicted to rise to as much as $3 per pound.
However, Green Mountain recently expanded its existing partnership with the J.M. Smucker Company. Their partnership, which started in 2010, has been very successful for both companies. The expanded agreement will make Smucker brand coffees (namely Folgers, Cafe Bustelo, and Milstone) available in Green Mountain's upcoming Keurig systems. The two will also expand their marketing and distribution efforts throughout the United States and Canada.
It's hard to make a confident buy or sell recommendation on Green Mountain at this stage. In the short term, it's likely to see rapid growth, at least through 2014; but competition is tough and only getting tougher. The company has lost its monoply on the production of K Cups, and coffee prices are expected to skyrocket. On the other hand, this deal with Coca Cola is looking like a very profitable partnership, and Green Mountain is continuing to investigate further avenues for expansion.
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Haris Qureshi has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Keurig Green Mountain, and SodaStream. The Motley Fool owns shares of SodaStream 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.