I kind of understand the Keurig coffee machine. I suppose if you live or work with a bunch of people who can’t agree on what kind of coffee to drink, it makes sense to spend five times as much so everyone has their own individual cup.
I really understand the deal Coca-Cola Co. made with Green Mountain Coffee Roasters Inc., the maker of the Keurig machine and its “K-Cups.” Coke put $1.25-billion (U.S.) into Green Mountain to partner with them on the “Keurig Cold” machine that’s coming, eventually, to take advantage of what’s being called “the home carbonation” trend.
What I don’t understand, however, is how anyone could buy Green Mountain stock at the prices it’s hitting after the Coke deal was announced. And now I’m kind of wondering about Coke, too.
A quick primer: For a number of years, Green Mountain has been a “story stock,” a tale of a revolutionary force in the beverage industry. Owners of its Keurig coffee makers could use its single-serve K-Cups to make one cup of coffee at a time. It seemed economical to many users who didn’t realize that, at the price of the K-Cups, it would just be cheaper to make a pot of coffee and dump more than half of it down the drain.
Never mind. Keurigs flew off the shelves, and K-Cup sales grew as the company lined up numerous partners, including the big fish, Starbucks Corp.
Yet, Green Mountain’s Coke announcement last week came at an opportune time – the same day as quarterly earnings that showed the company’s long-term growth story was coming to a bitter end. Total revenue was up 4 per cent, cup sales were up 8 per cent, and machine sales dropped 1 per cent year-over-year.
The enthusiasm of Canaccord Genuity analyst Scott Van Winkle exactly matched the market reaction: “Beyond brewers, total sales were in line and EPS was ahead due to … blah, blah, blah, yada, yada, yada. What are we writing? None of this really matters today!”
Mr. Van Winkle said investors had given little to no value to the Keurig Cold opportunity until last week. “However, the size of the ultimate platform, the magnitude of retailer interest, the pace of consumer adoption and the geographical distribution opportunity all increased exponentially” due to the Coke deal. “As such, we believe that GMCR will now be viewed, and valued, as a growth stock again, rather than a staple.”
Yeah. Shares are up almost 50 per cent in the last week, and Coke’s stake is now worth $2-billion. The forward price-to-earnings ratio now tops 30, pretty neat for a company that expects single-digit sales growth and just diluted its shareholders. (Don’t worry. Green Mountain says it will take some of the money it got for selling shares to Coke at $74.98 and buy back stock on the open market at the current price around $120 to offset the dilution.)
A giant risk for Coke? Not really, since the Green Mountain stake pales in comparison to its market capitalization of $170-billion. Analyst Thomas Mullarkey of Morningstar says that if Keurig Cold reaches 6.5 million households, and each household averages 2.5 people who drink 200 Coke “pods” per year, he estimates that the Keurig system could provide slightly less than 1 per cent of Coke’s global beverage volume.
(That’s because all those people will find it much more convenient to brew their own glass of Coke rather than going to the trouble of … opening a can? “Home carbonation” is even dumber than single-cup coffee.)
Instead, looking at the deal makes you wonder about how things are at Coke. Carbonated soft drink sales are declining more rapidly each year in the United States; Mexico is taxing the drinks to combat obesity. Coke is a gigantic global brand, and the stock gives investors great international exposure at a time emerging-markets funds are looking shaky. It’s just that there are a fair number of signs pointing in the wrong direction at Coke, probably too many to make the stock a clear “buy.”
But at least the signs at Coke are mixed. With Green Mountain, Herb Greenberg, the king of skeptical stock journalists at thestreet.com, has been pointing out issues for some time. In the last few days, the boosters have been pushing him to admit he’s wrong. “I’ve clearly been on the wrong side of Green Mountain the stock, but on the right side of Green Mountain the business,” he replied, accurately.
So I ask you: If a business is going in one direction and the stock is going in another, would you buy in? I don’t think I’d understand it if you did.