Keurig Green Mountain (UNKNOWN:GMCR.DL) has been percolating this year. Shares of the undisputed champ of one-cup blasts of premium home- or office-brewed coffee have soared 65%, stunning naysayers who figured that its best days were in the past.
You don't have to look far to find the biggest contributor to Keurig Green Mountain's spike. Coca-Cola (NYSE:KO) paying $1.25 billion for a 10% chunk of the company sent shorts scrambling for the exits. The world's leading beverage company was not only validating Keurig Green Mountain's business, but also helping to improve its fortunes by offering its killer soft-drink brands to the upcoming Keurig Cold beverage system. The cherry on top came a few months later when it paid far more than roughly $75 a share to increase its stake to 16%.
Coca-Cola is no stranger to taking sips of other beverage lines. It's not afraid to write big checks to diversify into juices, iced tea, and vitamin-fortified water. Coffee is a no-brainer, even if its role in the Keurig Cold maker of chilled carbonated and non-carbonated beverages is what's been hogging most of the attention behind the deal.
However, it's not just Coca-Cola turning to Keurig Green Mountain for a boost to its own flat sales. Keurig Green Mountain also helps out its own cause. Sales growth of K-Cups has been reportedly accelerating in recent months. Dougherty & Company issued a report last month, noting that K-Cup unit sales for the four weeks through mid-June had grown 11.5%, accelerating from the high-single-digit pace at which it had been moving earlier in the year. Argus Research then upgraded the stock -- as the first half of the year neared, it closed with a price target of $140, forecasting a 10% spike in sales growth this year. That is higher than the 8% top-line uptick that was the analyst consensus at the time.
The momentum is contagious. Over the past few weeks alone, we've seen Subway announce that all 30,000 of its locations in the U.S. and Canada will bring on K-Cup machines to be able to serve fresh java all day long, BJ's Wholesale Club turned to Keurig Green Mountain for its private-label K-Cup offering, and global giant Nestle worked with Keurig Green Mountain to put out the first line of K-Cups with creamer included.
All of these developments aren't too shabby for a company that some had left for dead two years ago, when the key patents governing its K-Cup portion packs expired. Keurig Green Mountain has made the most of the leveled playing field, and the excitement for new platforms in Keurig 2.0 and Keurig Cold will bring new waves of patent protection.
Along the way, Keurig Green Mountain continues to surprise the market. It has easily beaten Wall Street's profit targets over the past several quarters, and while there will be challenges in the future as it tries to succeed with Keurig 2.0 and Keurig Cold, investors are following Coca-Cola by buying into the resilient company.