The Dow Jones Industrial Average (DJINDICES:^DJI) was up 21 points as of 1 p.m. EDT Tuesday, holding steady for what could be another closing record high.
Dow component Coca-Cola Company (NYSE: KO) and specialty coffee maker Keurig Green Mountain (NASDAQ:GMCR) respectively shot higher by 0.9% and 9.7%.
The gains came on news that Coca-Cola is increasing its previously announced 10% ownership stake in Keurig Green Mountain to 16%. This will make Coke the largest shareholder in the manufacturer of the Keurig coffee makers, with about 26 million shares.
Following the romance
Before we dive into why Coke is so smitten with the Keurig (the branded single-serve beverage product), let's briefly look at how this romance evolved over the past few months.
- In February, Coke announced it would buy 10% of the company then known as Green Mountain Coffee Roasters for $1.25 billion.
- Simultaneously, Coke agreed to make the company the exclusive partner to produce and sell single-serve, pod-based versions of Coke's flagship brands.
- Today, Coke announced in a regulatory filing that it was increasing its stake in the company to 16%.
Why has Coke fallen head over heels?
Coca-Cola is a massive company. It does business in every corner of the world. Short of adding a second faucet for Coke in kitchens globally, the growth for the company's flagship brands is fairly limited.
Enter Keurig Green Mountain. For Coke, the Keurig device is a new channel to bring Coke, Diet Coke, and its other drinks into the household. It's about as close as the soda giant will likely ever come to installing that second faucet.
This investment could very easily prove to be a multibagger
For Keurig Green Mountain, bringing on a strategic partner like Coca-Cola mitigates many of the core risks the company faces, as well as supercharges the potential upside.
Most significant is Coke's global brands coming exclusively to the Keurig 2.0, the next-generation machine slated for launch in Keurig Green Mountain's fiscal 2015. This new device will brew cold beverages, as well as the traditional coffee and tea.
Coke also brings decades of global experience in markets thus far untapped by Keurig Green Mountain, which so far only sells its products in the U.S. and Canada. Long term, the company knows that real growth will come by going international. it should be able to leverage Coke's distribution network, as well as its on-the-ground knowledge of doing business in countries across the globe.
For a deeper dive into these benefits, click here.
What happens next?
First and foremost is the launch of the Keurig 2.0. We should all expect to see heavy cross promotion between Coke and Keurig Green Mountain, with Coke and Diet Coke featured prominently. When the rubber hits the road, consumers must be willing to buy this new system. If the launch flops or in any way disappoints, expect the stock to suffer significantly.
That said, consumers have fallen in love with the original Keurig system for brewing coffee, and as a stand-alone business the international opportunity remains strong. So for the long-term investor, this should provide some comfort. That said, the company currently trades at over 34 times trailing 12 month earnings -- so there is significant expectations for future growth baked into the valuation.
And who knows, maybe Coca-Cola will continue buying shares, and investors in the company can sit back and enjoy days like today.
Jay Jenkins owns shares of Keurig Green Mountain. The Motley Fool recommends Coca-Cola and Keurig Green Mountain. The Motley Fool has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. 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.