Why Keurig Green Mountain Inc. Stock Has Skyrocketed 87% in 2014


Source: Keurig Green Mountain.

Among high-profile stocks, Keurig Green Mountain (NASDAQ: GMCR  ) has given investors one of the most turbulent rides in recent years. Having soared above $100 per share only to fall below $20 by 2012, the coffee machine specialist's stock has now returned to bull-market mode by more than tripling to all-time highs since the beginning of 2013. While one of the obvious catalysts for the stock's ascent to record levels was beverage giant Coca-Cola's  (NYSE: KO  ) purchase of a major stake in Keurig Green Mountain, investors also have to admire the company's uncanny ability to protect its business in the face of major long-term challenges.

Right now, Keurig Green Mountain investors seem optimistic about the company's future, but how much higher can the stock soar? Let's look at Keurig Green Mountain more closely to see whether its huge gains so far in 2014 can continue.

Stats on Keurig Green Mountain

2014 YTD Return

77.8%

Expected Fiscal 2014 Revenue Growth

7.1%

Expected Fiscal 2014 EPS Growth

12.1%

Expected 5-Year Growth Rate

16.3%

Source: Yahoo! Finance.

Why has Keurig Green Mountain soared?

Obviously, the highest-profile reason why the home-brewer maker has attracted so much investor attention in 2014 is the new strategic partnership with Coca-Cola. In February, Coke said it would spend $1.25 billion to obtain 16.7 million new Keurig Green Mountain shares as part of a 10-year collaborative agreement, representing a 10% stake in the company. Just a few months later, Coca-Cola confirmed that it had raised its stake in Keurig to 16%. Some believe Coca-Cola will eventually simply buy Keurig Green Mountain outright, and that's clearly driving at least some of the speculative fervor for the stock.


Source: Keurig Green Mountain.

The Coca-Cola deal does more than just boost demand for Keurig stock. It also expresses confidence in the company's long-term business model. Investors have speculated that Coca-Cola expects the new Keurig Cold system to represent a major potential new distribution model for the beverage giant -- the hope being that by venturing into the home-serve carbonated-beverage market, Coca-Cola can defend its overall market share and avoid losing business to SodaStream (NASDAQ: SODA  ) and other companies offering alternative cold-beverage options. Meanwhile, Keurig could benefit from Coca-Cola's existing distribution model, widening its exposure to potential customers for its home-beverage machines for both hot and cold drinks.

Yet many investors forget that Keurig Green Mountain shares were rising long before Coca-Cola entered the picture. When many believed that the expiration of its original K-Cup patents would doom Keurig's future, the company defied skeptics by keeping possible rival Starbucks (NASDAQ: SBUX  ) as a K-Cup partner. Moreover, new machines have helped Keurig maintain its intellectual property, and that has given investors a path forward for continued profits.

Meanwhile, Keurig Green Mountain continues to sign up new partners. Last month, Kraft Foods (NASDAQ: KRFT  )  agreed to allow Keurig to sell single-serve Maxwell House coffee. Similar deals will only expand Keurig's long-term reach.

What could hold Keurig Green Mountain back?

As a seller of coffee products, Keurig Green Mountain is subject to commodity price pressures. Recently, coffee prices have been on the rise, and that has forced Keurig to push through cost increases to customers. Keurig has largely hedged itself against further price increases for 2015, but if poor weather patterns persist, we may see further price spikes into future years as well.


Source: Keurig Green Mountain.

Keurig Green Mountain also faces challenges to its intellectual property rights. The introduction of the Keurig 2.0 reset the clock on some of the company's patents, although certain competitors have challenged this standing. Given how much Keurig relies on license revenue, any damage to its intellectual property rights could be catastrophic for the company -- as 2012's terrible performance shows.

The big picture for Keurig Green Mountain

Keurig Green Mountain has a promising future, and Coca-Cola's strategic purchases have put the company in the spotlight. Now, Keurig Green Mountain has to execute on its potential growth in order to give investors what they expect. If Keurig falls short, then the gains in the stock so far this year could evaporate like so much undrunk coffee.

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  • Report this Comment On September 04, 2014, at 5:12 AM, AncientGeek802 wrote:

    Good article. Thank you.

    Some comments regarding the ending.

    Though loss of intellectual property rights were a factor in the rapid decline of the share price between the summer of 2011 and the summer of 2012, there were many other factors that were likely more responsible.

    1. The stock was highly over-bought in 2011 due to hyper growth that was partly organic, but significantly fueled by acquisitions made in 2009 and 2010 and back to back price increases in the first half of 2012.

    2. At the apex, high profile short positions started sewing the seeds of Fear, Uncertainty and Doubt to bolster their positions and likelihood of success and inspiring others to short the stock.

    3. The company modestly missed some guidance numbers after consistently beating them and investor reaction was punishing.

    4. The previous hyper-growth cooled dramatically due to achieving essentially full distribution in North America and having absorbed acquisition sales and earnings into YOY comparisons.

    2013 represented a more normalization of company value, while 2014 valuation appears to be once again leaning forward in anticipation of future results.

  • Report this Comment On September 04, 2014, at 6:28 AM, AncientGeek802 wrote:

    Correction to my comment above. The back to back price increases were in the first half of 2011. I incorrectly stated 2012 above.

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