Please ensure Javascript is enabled for purposes of website accessibility

Is the Coca-Cola Partnership With Green Mountain Truly a Game Changer?

By Bob Ciura – Feb 10, 2014 at 5:40PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Green Mountain's partnership with Coca-Cola to create the Keurig Cold at-home beverage system is an exciting possibility. But it's important for investors not to get carried away.

In the wake of the announcement that Coca-Cola (KO 0.10%) will partner with Green Mountain Coffee Roasters (GMCR.DL) to create the Keurig Cold at-home beverage system, the financial media is abuzz with excitement. None other than Jim Cramer called the partnership a "game changer" on CNBC. With shares of Green Mountain having soared since the day of the announcement, it's easy to get swept away with a sense of euphoria. At the same time, investors may want to take a breath before getting overly excited.

First, the details
Last week, Coca-Cola revealed it would invest $1.2 billion to acquire a 10% minority stake in Green Mountain. Together, the two companies will prepare the launch of the Keurig Cold beverage platform as part of a 10-year agreement. The deal creates obvious synergies, as Coca-Cola will have the potential to get its products to customers through an innovative new system. And Green Mountain now has the ability to tap into Coca-Cola's world-class brand and massive distribution capabilities.

The deal is basically a no-lose scenario for Coca-Cola. It could strike gold if the technology is universally adopted, and considering shipment volumes of sparkling beverages are flatlining in the United States, it's certainly an idea worth pursuing. Plus, Coca-Cola's $1.2 billion investment is essentially a drop in the bucket for the company, as it raked in more than $6.8 billion in net profit over the first three quarters of 2013 alone.

The Keurig Cold beverage system has the potential to become a premium cold-beverage platform and reenergize growth in what appears to be a stale sparkling-beverage industry, especially in the United States. Going forward, Coca-Cola and Green Mountain hope to provide customers around the world with a convenient way to prepare their favorite cold beverages at home.

The partnership is clearly a shot at SodaStream (SODA), which is struggling to regain its own momentum. Management expects full-year revenue to hit $562 million, representing 29% growth. While that sounds impressive on the surface, it's about half the pace of growth from the prior year. SodaStream booked 51% revenue growth in the previous year, meaning investors should be moderately concerned about the slowing pace of growth for at-home soda machines.

Green Mountain's momentum set to skyrocket?
Green Mountain had some positive momentum after reporting strong results in fiscal 2013 as well as the first quarter of fiscal 2014. Now the company hopes to keep that going with its Coca-Cola partnership. Green Mountain generated 16% sales growth in 2013 along with adjusted earnings growth of 45%. Even more impressively, Green Mountain's free cash flow was nearly eight times more than last year, rising to $603 million.

Green Mountain followed up this performance with 26% adjusted earnings growth in the fiscal first quarter. This was driven by the fact that Green Mountain sold 5.1 million Keurig brewers during the holiday period, which set a company record. However, it's worth noting that Green Mountain's sales grew just 4% during the first quarter and were widely seen as a disappointment. That's why its partnership with Coca-Cola is so important to keep its future growth trajectory intact.

Be wary of sky-high expectations
Of course, it's worth noting that the success of the Keurig Cold at-home beverage system is far from guaranteed. Investors can take their cues from SodaStream, whose growth has slowed. There seems to be a distinct difference between the traditional Keurig coffee brewers and the cold-beverage system. While customers have widely accepted brewing their own coffee at the push of a button, their attitudes toward making their own cold sparkling beverages remains to be seen.

Plus, investors should note that Coca-Cola's investment in Green Mountain is at an average price of $75 per share. With Green Mountain's stock skyrocketing to more than $100 per share immediately after the announcement, expectations are already sky-high.

Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Green Mountain Coffee Roasters, and SodaStream. The Motley Fool owns shares of Coca-Cola and SodaStream. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Keurig Green Mountain, Inc. Stock Quote
Keurig Green Mountain, Inc.
GMCR.DL
Coca-Cola Stock Quote
Coca-Cola
KO
$62.69 (0.10%) $0.06
SodaStream Stock Quote
SodaStream
SODA

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.