Keurig Green Mountain Inc (NASDAQ:GMCR), the premier name in single-cup coffee brewers and the originator of the ubiquitous K-Cup, has delivered remarkable returns for its long-term investors.
Shares of GMCR stock are on the rise again on Wednesday. So is Keurig Green Mountain Inc a company to chase or dump?
The Rise of GMCR
GMCR stock has been as stimulating for investor portfolios as its product has been for coffee-drinkers: In the last year, Green Mountain stock soared more than 60% and in the last five years, shares gained more than 460%.
And in the last 10 years, Keurig Green Mountain stock enjoyed massive returns, delivering more than 6,900% gains for its early investors.
The returns of the S&P 500 (INDEXSP:.INX), while not shabby in themselves, seem offensively low by comparison. In the last 1-, 5-, and 10-year periods, the benchmark index returned just under 10%, around 80%, and then 70%, respectively. GMCR has been significantly beating the market for years now.
In March of 2014, the S&P 500 itself took notice, and welcomed GMCR into its ranks. Keurig Green Mountain officially became one of the big boys of Wall Street, displacing WPX Energy Inc (NYSE:WPX) in the S&P to join the ranks of arguably the most important index in the world.
Building a Portfolio of Partners for Keurig Cold
GMCR stock continued its ascent on Wednesday, gaining as much as 6% on news that the coffeemaker reached a deal with Dr Pepper Snapple Group Inc. (NYSE:DPS). Specifically, Keurig Green Mountain is coming out with a cold-drink machine in the fall — to be called Keurig Cold — and DPS is the second major soft drink company to agree to make capsules compatible with the machine. You may’ve heard of the other one: The Coca-Cola Co (NYSE:KO) has agreed to make several of its brands available for the Keurig Cold as well.
Keurig says it now has deals for at least 30 different brands of beverages to make capsules for the machine.
While today’s stock market reaction to the Dr Pepper Snapple Group deal seems to say otherwise, it’s not too shocking that GMCR has been able to recruit beverage companies to be a part of the ecosystem. Coca-Cola, after all, actually owns 16% of GMCR — KO took a 10% position last February, and then KO purchased another 6% of GMCR last May.
While Coca-Cola doesn’t want to see its competition thrive, it also wants to protect its investment in GMCR, and Keurig Cold will never succeed if the consumer doesn’t have a plethora of well known beverage brands he or she can choose to brew.
The lack of major compatible brands has been perhaps the biggest obstacle to Sodastream International Ltd (NASDAQ:SODA) thus far. Sodastream’s do-it-yourself home carbonation systems mostly rely on Sodastream’s own branded flavors for inputs, and the average consumer isn’t likely to get excited by that.
GMCR bulls who are excited by the idea of eating away market share from Sodastream should re-examine SODA’s revenues before getting too excited. Let’s say the Keurig Cold stole every last dollar of SODA’s revenue the first full year it was on the market. For Keurig, it would be the the fiscal year ended Sept. 2016, when analysts expect GMCR revenue of $6.12 billion. FY 2013 revenue for SODA stock was $562 million, which amounts to 9.2% of GMCR’s projected FY 2016 revenue.
In other words, that’s not the best reason to buy into Keurig stock today.
Nor is the extremely speculative thesis of some investors, who postulate that KO will eventually buy out the rest of GMCR stock. Solid long-term investments shouldn’t need rumors to look like solid long-term investments.
Trading at a forward P/E above 30, GMCR stock is priced for perfection — which by definition leaves little room for error going forward.
Even though Keurig Green Mountain has been one of the stock market’s best performers in recent years, I’d be careful not to be blinded by its historical returns. At this valuation, GMCR stock’s future won’t be nearly as sweet.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid.
