Green Mountain: How Long Will its Upward Trend Last?

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.

Future trajectory
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.

Final thoughts
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.

Will this stock be your next multi-bagger?
Give us five minutes, and we'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer handpicks one stock with outstanding potential. But it's not just any run-of-the-mill company; it's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year, his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252%, and 1,303% during the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.


Read/Post Comments (0) | Recommend This Article (0)

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.

Be the first one to comment on this article.

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: 2977979, ~/Articles/ArticleHandler.aspx, 9/21/2014 2:44:11 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...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement