Keurig Green Mountain: Why Investors Should Look Beyond the Weak Outlook

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Nov 26, 2014

Keurig Green Mountain (GMCR, Financial) ended the fiscal year on a strong note, having released strong results for the fourth quarter. The company saw impressive growth in revenue and earnings, beating consensus estimates. But, the shares of the company fell due to the conservative outlook that it released for the future. However, Keurig’s management is looking forward for a better fiscal year ahead and is confident of achieving strong growth. It will be exciting to see how Keurig aligns itself for better performance and faces the competition from its peer such as SodaStream (SODA). Let us have a look.

A look at the quarter and beyond

In the recently reported fourth quarter, Keurig’s revenue rose by 14%. Also, its net sales increased impressively by 22%, but segment wise, its sales also dropped on some grounds. On the earnings front, Keurig’s earnings rose by a penny which also outpaced analysts forecast for a drop to $0.77 per share.

Keurig Green Mountain has been impressive on the stock exchange and is among the high flyers in the industry. The company also justified its image yet again by posting solid results for the fourth quarter. The management is also pleased with the momentum that it is seeing. Further, the strong balance sheet and free cash flow generation are expected to be an advantage to the company, helping it to drive its growth further. Keurig is also focusing on returning the value to the shareholders.

Focusing on growth areas

For the coming fiscal 2015, Keurig is focusing on various opportunities which may help it to grow and advance its home beverage in both its cold and hot drinks platforms. Keurig is further planning to invest in these initiatives. The company has a fair image of innovations and has also built good relationship with the customers and it thinks that it will help the company to further attract the customers to its brand driving its sales further.

But Keurig is also facing some headwinds due to the recent news of the resignation of its CEO. The company shares dropped after the news was announced. In order to cope with this, Keurig has also posted a conservative outlook. Moreover, to offset the negative effects of this it is planning to launch a home use carbonated beverage dispenser. With this, it is expected to give good competition to its rival SodaStream.

The company is also responding to the customer preference for more choices in portion size. Keurig launched its 2.0 platform with multiple size cups and a carafe with added choices. This is an exciting move by Keurig as it is seeing good customer engagement now, it is further focused on adding additional options in this portfolio in the coming quarters. The company has already started advertising, promotion and merchandising of its upcoming 2.0 platform.

In order to create interest regarding its platform among the customers, Keurig is running a broad-based marketing campaign. It is making use of TV and other digital media. The main aim behind this initiative is to make customers aware of the versatility of its new platform. In addition, it is also running nine and a half weeks of local TV designated geographies, also supplementing its TV presence with 12 weeks of local digital advertising in the same areas.

It is expecting the holiday season to be soft so it has already increased its in-store demonstration for it. All these efforts are focused on driving trial, awareness and direct sales in this holiday season, given the competition from the peers in the challenging market. Keurig is also expecting good performance on the international front as well; it launched the Keurig beverage system in the UK and other potential end markets.

Conclusion

Keurig looks slightly overvalued with a CAGR of 37.53, but the forward P/E of 29.61 shows good earnings growth in the near term. Besides this, the company is making impressive moves to add several new platforms which are expected to help company in gaining market share in future. This will also make Keurig a good long term prospect. Considering all these facts, Keurig is a good pick as of now.