How good has 2014 been for Keurig Green Mountain (GMCR)? So good that it’s time to take profit, says Buckingham Research’s Matthew DiFrisco and Katherine Heng. They explain:
Jason Myers for the Wall Street Journal We are lowering our investment rating to Neutral on Keurig Green Mountain shares and recommend investors with shorter time horizons use the recent share appreciation to take profit. Keurig Green Mountain shares are up over 65% YTD, meaningfully ahead of the S&P’s 5% gain. We maintain our above consensus outlook for both FY14 and FY15, reflecting greater revenue and margin estimates. Upside to our outlook is limited given upfront investments for both the F4Q14 introduction of 2.0 hot brewing platform and the FY15 launch of the cold system in addition to unfavorable YoY coffee costs in FY15.
As you might have noticed, however, DiFrisco and Heng still like what Keurig has been able to do, including its deals with Target (TGT) and Coca-Cola (KO):
Keurig Green Mountain has already begun to recoup dollar market share from its unlicensed rivals as well as convert them to licensed partners. Notable partner conversions include Target’s Archer Farms and Peet’s Coffee transitioning later this summer. Keurig Green Mountain’s company and licensed brands grew 11.6% YoY in the last 4 week period measured by Nielsen and garner 74.8% dollar share of grocery vs. 74.5% the prior month and 84.5% a year ago. The single serve coffee category as measured by Nielsen in grocery grew 26% last month, vs. 46.5% in the year ago period…
If you assume in the first 3 years that Keurig Green Mountain’s cold system, with the aid of Coca-Cola, could garner ~1% of the ~$125B soft drink market in the US at its current EBIT of ~20%, it would add $250M in EBIT, or 25% of FY14E EBIT.
Shares of Keurig Green Mountain have dropped 2.7% to $122.63 at 11:53 a.m., while Coca-Cola has gained 0.5% to $41.75 and Target has risen 0.4% to $58.95.
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