Keurig Stock Set for a Slowdown? (GMCR)

The K-Cup system locked up holdout Kraft, but market penetration and margins might finally trip up the stock

   
Keurig Stock Set for a Slowdown? (GMCR)

If anything is going to stop Keurig Green Mountain (GMCR) stock, it might be the company’s own success.

KeurigGreenMountainNew185 Keurig Stock Set for a Slowdown? (GMCR)Keurig stock notched new all-time highs Monday — a pleasant hangover from GMCR inking a deal with holdout Kraft Foods Group (KRFT) last week. Keurig stock is now up 77% for the year-to-date. This upside can’t last forever, can it?

The Kraft agreement is indeed a big deal. The company controls brands like Maxwell House, Yuban, McCafe and Gevalia, but they weren’t available for use in GMCR’s brewing system. As the only holdout left among the global mass-market coffee brands, Kraft left a big hole in Keurig’s portfolio of licensed coffees.

Now that hole is closed, though, which shows that CMGR is intent on maintaining market dominance since the patents expired on its coffee-brewing system in 2012.

It’s a tough position for Keurig since its competitive moat is pretty narrow. After all, it’s a machine that makes a cup of coffee; it’s not a Tesla (TSLA).

So, sure, a company could come along with something better and cheaper than the Keurig K-Cup machine, but it won’t have any coffee to sell with it — or at least not the world’s biggest and most popular brands like Folgers and Maxwell House. Starbucks (SBUX) has its own single-cup system in addition to K-Cups, but while that announcement initially spooked GMCR investors, it certainly hasn’t killed the company.

Keurig Stock Set for a Slowdown?

There are other reasons for the market to be excited about Keurig stock — notably, the company’s partnership with Coca-Cola (KO) to devise a cold-beverage system that would compete with SodaStream (SODA).

But the launch of the cold system could be more than a year away, analysts say, and even then it will take several years to determine the ultimate potential for the business. That means Keurig stock is really trading on the GMCR’s single-cup coffee system, and there’s only so much growth left in the segment, bears say.

BTIG equity analyst Theo Brito thinks bulls underestimate the Keurig system’s market penetration — and potential. As the analyst wrote in a note to clients:

“We estimate penetration as high as ~45% (bulls say <20%), as not all households need or can afford a machine. Further, attachment rates decline as lighter users are penetrated & we believe this isn’t factored into estimates. We model +8-9% growth vs. a consensus closer to ~10%, and believe there could be downside to our estimate.”

The machines are pricey, but the cost of the pods is insane. Folgers in pod form costs $50 a pound, according to The New York Times. Hell, a pound of Starbucks whole bean house blend is less than half that. So the analyst likely has a good point there.

Margins have peaked, Brito points out, especially with coffee prices taking off from all-time lows. And anyone betting on more upside because of the Coke partnership (and even a possible acquisition) is going to be disappointed. Brito again:

“While Coke partnership is a strong endorsement of Cold System potential, it will be years before anyone can determine whether its potential is as large as the Hot System. Further, Coke already at its contractual maximum ownership of Keurig and post-Coke partnership, insiders have been net sellers.”

The analyst has a neutral rating (hold, essentially) on Keurig stock because there are no downside catalysts on the horizon.

Bottom Line

Although it is tough to see what could possibly slow down GMCR at this point, that doesn’t mean it won’t come back down to earth eventually. Sure, Keurig stock is a hold. Just make sure you keep those stop-losses moving up along with it.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2014/08/keurig-stock-slowdown-gmcr/.

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