The Year 2014 In Review: Keurig Green Mountain

The past 12 months turned out to be an important phase for Keurig Green Mountain (NASDAQ:GMCR), the leader in specialty coffee brewers.  Apart from a new brewer launch, the company remained busy in adding several coffee and retail brands to its list of licensed brands. In February, Coca-Cola (NYSE:KO) bought a 10% stake in the company for $1.25 billion. Shares of GMCR skyrocketed by 53% within the next two weeks touching its peak stock price of $123.74, before retreating back to $90 over the next three month period. To incorporate the value creation as a result of the deal between Keurig Green Mountain and Coca-Cola, we have added a new division called the ‘Keurig Cold.’  Later, in May, Coca-Cola raised its stake in the company to 16%. ^[1] As a result, shares of GMCR jumped 7.5% to $119.07. Simultaneously, the company released its March ended quarter report, and delivered strong performance driven by a combination of top-line growth and operating leverage. Keurig reported significant net sales of $ 1.1 billion, with a growth of 10% year-over-year, attributed to a 29% increase due to brewer sales volume. The net sales growth includes the unfavorable impact of foreign currency exchange rates, which reduced the sales figure by approximately 1%. ^[2]  In that quarter, the company announced its continued partnership with brands, such as Smuckers (NYSE: SJM) and Starbucks (NASDAQ: SBUX), as well as added Peet’s Coffee & Tea and Krispy Kreme (NYSE: KKD) as new partners. Lavazza, Green Mountain’s long term partner, entered the Keurig system to bring Italy’s favorite coffee brand to Keurig consumers.

Keurig continued with its plan of expanding its partnership with other big brands, and on June 10, the company announced its partnership with the restaurant chain, Subway, to bring Keurig’s single-serve brewers to almost all of the Subway chains in the U.S. and Canada. ^[3] This deal might prove to be a blockbuster move for Keurig Green Mountain, as Subway not only provides an added platform for the company’s revenue growth, but a huge platform as well. Again in July, the company announced a multi-year deal with the U.S. division of Nestlé (SIX: NESN), Nestlé USA, on July 1, to bring Nestlé’s branded coffee with creamer to its customers. Nestlé is the first brand to offer a 2 in 1 K-Cup pack for hot coffee, combining high quality roast and ground coffee with branded creamer, available in two flavors : Original and French vanilla. The Nestlé Coffee-mate K-Cups will be available in retail stores in the Spring of 2015. Moreover, the company delivered better-than-expected results in its third fiscal quarter earnings released on August 6, 2014, as it beat its EPS guidance by $0.11. ((Keurig Green Mountain Q3 2014: Earnings call transcript)) The company generated net revenues of $1.02 billion in the third quarter, up 6% year-over-year (y-o-y). This significant growth was primarily due to a 10% increase in portion pack net sales, partially offset by 4% decrease in brewer and accessory sales, and a 17% decrease in other product sales.

In August, Keurig made the most awaited release of the year, when it launched its new brewer version — Keurig 2.0, which has numerous advantages over any of the previous editions. All the new distribution deals helped the company end its fiscal 2014 on a high note.

We have a $108 price estimate for Keurig Green Mountain, which is roughly 20% below the current market price.

See our full analysis of GMCR here

Entry To New Beverage Segment

In December, Keurig announced yet another deal, when it entered into an agreement to acquire the remaining 85% equity of Bevyz, a fully owned subsidiary of MDS Global Holding Ltd., in the first week of December 2014. ^[4] Keurig initially held a 15% stake in Bevyz on a fully diluted basis, and agreed to acquire the remainder in a transaction worth €178 million (approximately $220 million).  Moreover, the company expanded its partnership with Coca-Cola in September to offer some beverages from the latter’s still brands (non-carbonated) portfolio in the Keurig hot brewing system, in the U.S. and Canada. ^[5] Honest Tea is the first brand of the Coca-Cola Company that would be available in K-Cup packs. The new Honest Tea K-Cup packs feature two products initially, Unsweetened Just Green iced teas and Just Black iced teas, and they will join Keurig’s Brew Over Ice collection.

With these deals, Keurig Green Mountain is planning to expand its reach into the carbonation market and ready-to-drink (RTD) tea sector. RTD tea is one of the fastest growing segments in the beverage industry. In the U.S., the RTD segment registered a high double-digit percent growth to reach $5.1 billion in sales.  RTD tea is expected to generate sales of $5.3 billion in 2014 and grow at a CAGR of over 6% till 2018, providing ample growth opportunities to tea making companies. ^[6] The per capita tea consumption in the U.S. was 8.9 gallons in 2012. ^[7] The sales of specialty RTD tea & coffee at retail stores in the U.S. rose 25% in the last two years.  This is an area that could potentially be a large future opportunity for Keurig Green Mountain.

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1. SEC filing, May 8th, 2014 [↩]
2. GMCR 10-Q, Second fiscal quarter, May 7, 2014 [↩]
3. Keurig and Subway announce hot beverage partnership [↩]
4. Keurig Green Mountain to acquire Bevyz Global Ltd. [↩]
5. Keurig Green Mountain, Inc. and the Coca-Cola Company expand agreement to the Keurig hot brewing system [↩]
6. “RTD tea production in the US“, January 2014 [↩]
7. Per capita tea consumption in the united States, www.Statista.com [↩]