Coca-Cola (NYSE: KO) recently purchased a 10% stake in Green Mountain Coffee Roasters (NASDAQ:GMCR), which may push the company in a new direction: allowing consumers to produce its product in the comfort of their own homes. This acquisition comes on the heels of a recent advertising campaign by Israel-based competitor SodaStream. The campaign, which aggressively targets US homeowners and seeks to make at-home carbonation machines a common fixture in homes, has seemingly compelled Coke to respond to a shifting market.
With soft drink consumption losing market share due to ever-increasing beverage choices, salvation may come via Green Mountain's single-serving Keurig pods. No, Coca-Cola is not investing in Green Mountain's coffee, at least not yet. Rather, the company is investing in the new Keurig Cold, which is expected to roll out sometime late this year or early next year.
Both the management teams at Green Mountain and Coke claim that the upcoming device will revolutionize the soft drink industry. Based on its reported specifications, the Keurig Cold has the potential to leap-frog SodaStream's product by not requiring the replacement of carbon dioxide canisters. Long considered a brake on SodaStream's potential, if this is truly the case with the Keurig Cold, then Coca-Cola has an incredible and largely untapped market in the US.
Green Mountain is certainly pleased to have such a huge partner with which to push its new device. Already, Green Mountain's leadership expects sales growth in the high single-digits in the coming year. This is good, considering the slight drop-off in sales over this past year. As far as the stock goes, analysts seem to agree that the company's earnings per share will be roughly consistent with last year's planned projections, plus or minus a few cents.
Coca-Cola should be just as pleased with this investment. Coke has been struggling as of late, and it has avoided net decreases by cutting costs nearly across the board. Fool Dan Caplinger notes that the company's sales have fallen 3%, though this has been supposedly due to currency fluctuations. Though this is a plausible explanation, the variation in stock price has been somewhat disturbing (shares have fallen from around $43 per share to a low of $36 in the last year).
Yet at the same time the company has been diversifying its own business ventures. Coke's tea sales have grown by over 10%, and this seems able to balance out some of the soft drink sales the company has lost. As Caplinger comments, "(g)iven how Green Mountain has transformed the coffee industry with its home-brewer machines, there's every reason to think that a Coca-Cola/Green Mountain team effort could produce similar positive results."
Those results could be explosive.
Green Mountain and Coke are still two separate investments. Coke is nearly always a solid buy, although the price variation suggests that not much will be gained from an investment in the company in this particular cycle.
Green Mountain is a little harder to judge. Coke's investment in the company has boosted its stock price a great deal, but this gives a measure of concern that the company is overvalued. That being said, this should not indicate excessive volatility, but rather suggests that the discerning investor should measure the finances again before purchasing.
Given the variation that could occur between now and the planned roll-out of the Keurig Cold, the iron may be too hot to strike now. Waiting until the new device is a little closer to store shelves may be better for investors.
Kurt Avard has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Green Mountain Coffee Roasters, PepsiCo, and SodaStream. The Motley Fool owns shares of Coca-Cola, PepsiCo, and SodaStream. 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.