Warren Buffett has famously recommended only investing in companies that you can understand.
I understand thirst, and I'm buying Green Mountain Coffee Roasters (NASDAQ:GMCR) this month. Here's why.
Here's what happened
Coca-Cola (NYSE:KO) announced that it was purchasing 10% of Green Mountain for $1.25 billion. Why is Coke investing in a coffee company? Because next year Green Mountain is launching what it calls Keurig Cold, a single serve beverage system designed for cold drinks -- soft drinks, teas, juices, and so on -- and Coke wants its brands to be the first cold drinks available on the platform.
The implications are huge for Green Mountain. First, this deal is nothing short of a ringing endorsement for the future of the company from nothing less than the leading beverage company in the world. But what else is there to this story that has Coca-Cola and me investing so enthusiastically?
1. The single-serve concept has been proven as awesome
Green Mountain started as a coffee business. With the Keurig platform, the company has revolutionized the way millions of Americans get their daily cup of Joe. According to a recent Bank of America note, single cup coffee is now 30% of the market, nearly quadrupling from just three short years ago.
Green Mountain's platform is today in over 15 million households and serves coffee brands from Starbucks (NASDAQ:SBUX) to Caribou Coffee to its own Green Mountain grinds.
The single serve concept and Keurig platorm just works. Its convenient, its easy, and it produces a beverage that tastes great. And because of this, its taken the coffee world by storm.
2. Massive market to sell cold beverages
If the market for coffee is huge, the market for cold beverages is goliath. Coke is the world's leading beverage company, and will report year end financials later this month. Through the first three quarters of 2013, the company recognized sales of $35 billion. PepsiCo (NYSE:PEP), the second largest global beverage brand, reported revenues of $29 billion for the same period in its Americas, Europe, and Asia/Middle East/Africa beverage units (PepsiCo also has a substantial food business, which has been excluded in this revenue figure).
Green Mountain reported an impressive (but tiny compared to Coke) $4.3 billion in annual revenues for its last year end back in September 2013. The growth potential in cold beverages is just incredible for Green Mountain. Coke and Pepsi sold a combined $64 billion of beverage products in nine months in 2013. That's nearly 15 times what Green Mountain reported in its most recent full year!!
In its latest SEC filing, Green Mountain reported that 100% of revenues were generated in the U.S. and Canada. The company states that global expansion is part of a "longer-term" growth plan. The new partnership with Coca Cola dramatically increases Green Mountains chances for international success. Coca Cola has long established relationships, distribution channels, and expertise all over the globe. The value of this knowledge and experience to a young company with international ambitions should not be understated. Green Mountain will be going global, and I think it will be sooner rather than later.
3. What if Keurig Cold Diet Coke doesn't taste as good as bottled Diet Coke?
One of the largest risks is the quality of the beverages produced by Keurig Cold. The original Keurig product was successful because, among other reasons, it produced delicious coffee. Keurig Cold hasn't yet come to market, and its still to be determined if it will stack up against the cold drinks already in your refridgerator.
Coca Cola executives, smart investors as they are, had the same concern. Green Mountain CEO Brian Kelley stated that Coke has actually been in discussions about the deal for months, and have been very close to the development process for Keurig Cold. Why? Because they needed to be sure that a Coca Cola poured from a Keurig would taste like, well, a Coca Cola.
Through this process, these executives became comfortable with the product and backed up their confidence with $1.25 billion of company money. If these executives feel $1.25 billion comfortable with the product, then so do I.
Feeling thirsty yet?
Taken altogether, the investment thesis for Green Mountain is pretty simple. It produces a fantastic product that is transforming the method for coffee consumption in the United States. It has tremendous growth opportunities both in their existing coffee niche, as well as a treasure trove awaiting in cold beverages. Coca-Cola has vouched for the company with a $1.25 billion vote of confidence, and will be bringing its globally leading cold beverage brands to the Keurig platform.
Great products, tremendous opportunities for growth, and backing from the global industry leader. Suffice it to say, I'm buying.