Not all great growth stock stories come from revolutionary ideas. Sometimes all it takes is a simple cup of coffee to rock the investing world.
Over the past five years Keurig Green Mountain Inc (GMCR) has produced a 385% return compared to the 80% return for the S&P 500. Just in 2014, GMCR stock was up 77%.
GMCR’s basic strategy has been based on the printer and ink model in which GMCR sells its machine at cost and makes money off of selling its proprietary pods. GMCR lost its initial patent in 2012, which prompted competitors like TreeHouse Foods Inc. (THS) to enter the market with similar technology.
Hoping to maintain its competitive advantage, GMCR launched Keurig 2.0 that only accepted GMCR pods, but competitors have found workarounds while calling the GMCR process anti-competitive.
Looking forward to 2015, GMCR has garnered a powerful strategic partner that has made a significant investment in the company and pushed into an extremely competitive industry but, as of its own admission, may not see the growth in 2015 as was seen historically.
Strategic Moves in 2014 Drive GMCR Stock
GMCR’s success in 2014 was driven by a number of different events. Due to the overall success of its Keurig system, GMCR has been able to attract big-name licensing partners.
GMCR was able to sign a multi-year deal with Kraft Foods Group Inc (KRFT) to sell pods with the iconic Maxwell House brand and the McCafe product brand that Kraft licensed in 2013. These brands were added to GMCR’s own stable of brands, which also included a previous deal with Starbucks Corporation (SBUX).
Having a strong partner that can open doors is important and GMCR partnered with one of the strongest in the world in February 2014 when The Coca-Cola Co (KO) purchased 10% of the company. KO’s interest has since grown to more than 16% after it exercised options to acquire more shares.
As the growth rate of carbonated beverages has slowed, KO has sought to diversify its holdings and seek out new customers. KO’s investment in GMCR represents a bet on GMCR’s new cold-beverage system that it plans to launch this fall.
To solidify its potential position in the at-home cold beverage distribution market, GMCR used its strong balance sheet to buy MDS Global Holding Ltd for approximately $220 million in December. Although it has high potential, the company had yet to have any products on the market but was in the development of a patented, single-serving system that can serve both hot and cold beverages.
Looking at 2015
Recently, GMCR recalled more than 7 million of its Mini Plus Brewing System machines due to a potential burn hazard. GMCR was able to quickly deploy a free repair kit that will help to minimize any potential harm to its consumers and its brand image, but latent concerns regarding product quality may hurt sales into the New Year and beyond.
In its most recent quarter GMCR reported strong sales of K-Cups tied to the release of Keurig 2.0, but competitors have found workarounds and are raising legal issues that may constrain future sales.
Finally, GMCR announced in its most recent earnings that it expects 2015 revenue growth in the high-single to low-double digit range and earnings-per-share growth in the mid- to high-single digit range. This continues a trend of decreasing momentum with GMCR revenue growing 8% in fiscal 2014, down from 13% the year prior and 45% in 2012.
This slower sales growth could easily translate into a stalled stock price, although with KO taking a significant position in the company the potential for a buyout remains high.
The Bottom Line
For GMCR stock, 2015 will be all about the performance of the at-home cold beverage machine that will launch in the fall. Investors should not expect 2014 stock gains repeated in 2015 as GMCR matures into a brand leader within the at-home beverage space and increased competition due to its patent expiration intensifies.
Potentially on the upside, if GMCR’s cold beverage machine ends up being a market winner, expect KO to potentially look to make a move and add it to its diversifying portfolio.