Shareholders of Keurig Green Mountain Inc (NASDAQ:GMCR) probably sleep pretty well at night. They hold shares of a company that has an iron grip on the home coffee market — one in three homes in the U.S. own a pod-style coffee machine, and Keurigs are the king of the hill.
GMCR last year sold nearly 10 billion of its Keurig-specific pods, or enough to circle the globe more than 12 times. And those little K-cups may as well be gold for investors who hold GMCR stock, as each one holds 11 grams of coffee and are sold for around $40 per pound.
That’s what I call profit.
But enjoy it while it lasts, because there are some pretty significant headwinds brewing for GMCR stock.
GMCR Stock Profile
Keurig stock was on a roll for a long time, up a whopping 570% from the beginning of 2010 since its peak late last year, and GMCR was one of the S&P 500’s best-performing stocks in 2014.
But shares fell by 7% in November when GMCR lowered its guidance, and it dropped again last month when GMCR narrowly missed analysts’ earnings estimates, posting 88 cents per share. Revenue for the quarter was $1.4 billion, also slightly less than analysts’ expectations.
Keurig had been banking its fourth-quarter hopes on its next-generation coffee pod machine, the Keurig 2.0, which was designed to only use Keurig-brand coffee cups instead of containers made by lower-cost competitors. But investors and Wall Street were instead disappointed as sales were much slower than anticipated.
And to add insult to injury, GMCR had to recall more than 7 million Keurig Mini Plus machines late last year because of concerns that the coffeemakers would overheat and spray hot liquid on users.
GMCR’s Green Problem
For all the coffee that Keurig grinds, and for all the little K-cups that it sells, GMCR is quickly developing an environmental problem.
Keurig’s founder, John Sylvan, told The Atlantic that he doesn’t even own a Keurig machine. Part of that is because they’re too expensive for home use. “Plus it’s not like drip coffee is tough to make,” he told a reporter.
But Sylvan also openly talks about the environmental impact all those non-recyclable K-cups, and his public statements are the worst type of publicity that GMCR could want. When talking about the K-cup, he laments, “I feel bad sometimes that I ever did it.”
What’s more, GMCR’s top growth opportunity in 2015 will only make its environmental problems worse. Keurig is launching a new cold drink machine, Keurig Kold, that would let people use the ubiquitous K-cup to make ice tea and sparkling water as an entry into the cold beverage market, which is five times larger than the hot beverage market.
It also would be able to compete with Sodastream International Ltd (NASDAQ:SODA), which has a partnership with PepsiCo, Inc (NYSE:PEP). That arrangement is important to GMCR’s biggest shareholder, The Coca-Cola Co (NYSE:KO), which owns a 16% stake in GMCR.
Sylvan’s interview comes on the heels of an anonymous YouTube video titled simply Kill the K-Cup. The video, with surprisingly high production values and a pro-environmental message that appeals to the younger generation, has already been seen nearly 500,000 times and has spawned a popular #KilltheKup hashtag on Twitter Inc (NASDAQ:TWTR).
Keurig, for its part, has said it is working on making K-cups fully recyclable by 2020. But that won’t do anything for the potentially 54 billion K-cups that would be filling landfills by then.
The stage is perfectly set for a public backlash against GMCR stock. Don’t be surprised if GMCR has trouble reaching its quarterly and 2015 financial goals.
Bottom Line
GMCR is the go-to company for anyone who wants single-pod coffee machines. They’re fast, easy to use and wickedly expensive, which is great for Keurig’s bottom line.
But all good things must come to an end, and Keurig’s non-disposable coffee cups that are piling up in landfills by the billions each year will be a tough pill for environmentally friendly Americans to swallow — particularly when Keurig’s competitors offer a greener alternative.
Keurig Green Mountain will continue to chug along, but the environmental concerns will be a long-term drag on GMCR stock.
Patrick Sanders is Deputy Managing Editor of Investorplace.com. As of this writing, he held no position on any of the aforementioned securities. Follow him on Twitter @1patricksanders.
