It's been a busy two years for Keurig Green Mountain (UNKNOWN:GMCR.DL) CEO Brian Kelley. Since assuming leadership of the single serve coffee roaster in December 2012, Kelley has overseen the release of the company's next generation "Keurig 2.0" system and guided the "Keurig Cold" carbonated beverage platform toward commercialization, with a release slated for this fall. He's also notably presided over a 16% equity sale to his former employer, The Coca-Cola Company, (NYSE:KO), as part of a licensing deal that will incorporate Coke's hallowed soft drinks into Keurig Cold's drink portfolio.
What's most important about Kelley's tenure to date, however, is his penchant and drive for deal-making. Since late 2012, the management team at Keurig has neutralized competitive threats from all directions by pulling unlicensed K-cup sellers into its fold. For example, the company inked a deal with Kraft Foods Group in 2014 to bring megabrands such as Maxwell House and Gevalia to K-Cup format. More recently, Keurig announced in January that it would also feature Dr. Pepper Snapple's beverages in its Keurig Cold lineup.
Kelley's licensing and equity deals have reassured investors that the company has a solid foundation for future expansion. Starting with the announcement of the Coke tie-up last year, GMCR's stock has ascended like so many bubbles in a freshly poured soft drink, finishing 2014 with an emphatic gain of 77%. While shareholders may hope for similar performance in 2015, it's possible that the stock may actually retrace this year; below we examine three pertinent reasons why.
The Coke lift will weaken
As I argued last year, valuing the contribution of Coke's brands to the Keurig Cold platform and GMCR's business in general is fraught with difficulty. To briefly recap, Coke's trademark on Keurig Cold products is an intangible boost to GMCR's stock price; a very wide estimate of the value of future cash flows that will be generated from Coke branded, single-serve carbonated beverages. You can read the entire analysis here.
Yet as we draw closer to the launch of the Cold platform -- currently slated for fall 2015 -- part of that lift will dissipate. In fact, some normalizing of the Coke contribution to Keurig's market capitalization is probably already occurring. As you can see below, the stock peaked at more than double its initial 2014 trading price during the month of November, and has been tracking down steadily ever since:
While management sees significant potential in the Cold platform, due to its fall 2015 launch, CFO Fran Rathke cautioned analysts in a recent call to expect minimal revenue from the new system in calendar year 2015. Without any useful data for the entire year, investors may continue to discount the Coke lift in order to mitigate their risk after the stock's huge 2014 run-up.
GMCR doesn't look cheap relative to peers
One of the inherent pitfalls in valuing Keurig Green Mountain is its relative lack of comparability to other companies. Its proprietary single serve coffee delivery system, along with a model that adds licensing of third party products to its own manufacturing and distribution, leaves GMCR without a native competitor. The company shares some similarities with Kraft Foods Group and Starbucks, as both enjoy packaged coffee revenue streams. But Kraft is essentially a grocery business, and Starbucks a retail coffee company.
One could also compare GMCR to its new investor Coke and beverage partner Dr. Pepper Snapple, as both of these companies also employ a system that allows them to license their products (via independent bottlers). Yet both Coke and Dr. Pepper Snapple function as bottled beverage companies.
And in any valuation comparison, we can't omit soon-to-be competitor SodaStream International. At least in the delivery of cold carbonated beverages in the home, SodaStream represents the truest form of a direct competitor to Keurig Green Mountain.
However one chooses to view GMCR, it's hard to ignore the fact that since the Coke equity purchase early last year, Keurig's stock has divested itself from the types of valuation multiples associated with its various peers. Let's review the current forward price-to-earnings multiples of each of the companies mentioned above:
In the packaged consumer goods industry, the more established and predictable a company's cash flows and earnings, the lower the earnings multiple the market assigns. We can see that out of this group, only Starbucks, with its retail orientation and strong growth prospects, comes close to GMCR's valuation.
The company's disconnection from the group may come under scrutiny this year. While Keurig's fiscal 2014 revenues grew 8%, this equates to about less than half of the previous year's 13% growth rate. Management has forecasted fiscal 2015 revenue to fall somewhere between the high single to low double digits, in other words, between 8%-13%. A high single digit showing with little change from the prior year may pressure the company's stock price multiple to fall more in line with its peers.
Larger market forces may precipitate profit-taking
Even if conditions remain sanguine for Keurig Green Mountain (and a test is ahead as the company is due to report 1st quarter 2015 earnings in just over two weeks), the market itself might force GMCR's hand. While it's early in the year, the S&P 500 index has started off with a loss of 3%, and Keurig Green Mountain's performance in January is almost a carbon copy of the broader market. After several years of steady gains since the recession of 2008-2009, U.S. markets may finally retrace in 2015, especially if adverse global conditions begin to drag on an otherwise vibrant U.S. economy.
A soft equities environment may persuade some investors to lock in their phenomenal 2014 gains on GMCR. With the stock trading appreciably above its peers, the strongest tug of gravity may arise from simple, caution-driven profit taking. Expansion of its coffee portfolio and breaking into the carbonated beverage business certainly seem to bode well for Keurig Green Mountain over the long term. Yet don't count on the company's stock to necessarily repeat the results of the previous year in 2015 -- it might not even come close.