The market isn't feeling a lot of love for Keurig Green Mountain (UNKNOWN:GMCR.DL), but at least one Wall Street pro is taking a contrarian stance. Williams Capital Group analyst Marc Riddick issued an upbeat note on the struggling leader of single-serve coffee brewers.
Riddick reiterated his firm's buy rating on the stock on Tuesday morning, sticking with a price target of $63. That may have seemed brutally bearish when the stock peaked near $160 late last year, but after shedding more than two-thirds of its value that 12-month price goal represents a 38% pop from here.
These aren't pleasant times for Keurig Green Mountain. Last year's Keurig 2.0 update was a dud. The recent release of Keurig Kold appears to be dead in the fizzed-up water. K-Cup sales are declining, and new brewer sales are falling even harder. This may seem like an odd time to stand up and be bullish, but let's go over a few of the reasons why Riddick's voice in a wave of Wall Street pessimism may be worth heeding.
1. There is more to this holiday shopping season than Keurig Kold
Keurig's entry last month into the carbonated beverage maker market seems doomed. The prices for the systems and sodas are too high, and it's not the convenient game changer that many of us thought it would be.
This doesn't mean that everything's riding on Kold. Part of Riddick's bullish thesis is based on the arrival of the K200 coffee brewer and the retail return of Mini. Yes, the whole Keurig 2.0 platform irked java junkies for its restrictive scanning technology that limits brews to licensed K-Cup partners. It's a big reason why brewer sales are in a state of decline: unit volume has plunged 20% over the past year. Riddick still feels that the new lineup offers broader variety and more compelling price points. He predicts that the installed base of Keurig users in the U.S. will start to grow again from 21 million now as a result of the new offerings.
2. Payouts for the patient
It's been less than two years since Keurig Green Mountain initiated a quarterly dividend policy, and it has already boosted its rate twice. The new per-share rate of $0.325 translates into a yield of 2.8% as of yesterday's close, pushing the stock's total return north of 40% if it's where Riddick believes it will be a year from now.
The payouts are not in danger. Keurig Green Mountain continues to be very profitable, and its payout ratio of 35% is reasonable. It also leaves the door open for more double-digit increases in payouts, as its first two hikes have been. Keurig Green Mountain has a challenging future, but today's investors are being paid well to wait it out.
3. There's value in the stock
Keurig may have overestimated its control over the caffeinated masses with the pod-protective features of Keurig 2.0. There's no way that Keurig Kold reaches the mass market in its present form. However, this isn't a third of the company that it was a year ago -- even if that's what the share price suggests.
Keurig's latest guidance calls for earnings per share to clock in between $3.25 and $3.45 for the new fiscal year that began in late September. That prices the stock at just 13 to 14 times this new year's profit forecast. That's historically cheap for Keurig Green Mountain, and while that may be appropriate if the company remains in its present state of decline, the more likely scenario is that it eventually does right by coffee -- and at some point soda -- drinkers.
Rick Munarriz owns shares of Keurig Green Mountain. The Motley Fool recommends Keurig Green Mountain. 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.