Keurig Green Mountain Inc’s (GMCR, Financial) stock was trading down ~10% on Friday morning after the company’s presentation yesterday indicated slower-than-expected roll out and high initial price point ($300) for the product. The company will begin selling Keurig KOLD on its website this fall, while broader retail distribution will be finalized before the 2016 holiday season.
Morgan Stanley analysts have maintained their Overweight rating on the company post presentation. In a research report released today they noted:
“We believe the quality of product was very solid and will meet expectations of initial adopters of the technology, and we were encouraged to hear management's continued optimism regarding the platform's expansion potential outside the US.”
They further added:
"The stock still strikes us (although now at lower levels) as a business with a uniquely dominant position in one of the few high growth US food and beverage categories, and we remain confident that as the current level of uncertainty and transition normalizes GMCR will see a valuation more aligned with its mid-term growth potential."
GMCR is a leader in specialty coffee, coffeemakers, teas and other beverages in the United States and Canada. The company develops, produces and sells a variety of Keurig brewers, specialty coffee and other specialty beverages in portion packs, including hot apple cider, hot and iced teas, iced coffees, iced fruit brews, hot cocoa and other beverages for use with its Keurig hot brewing systems.
In addition to Keurig hot brewing systems, the company is also developing the Keurig Cold beverage system. Keurig Cold is an in-home cold beverage system that will use precisely formulated single-serve pods to dispense freshly-made cold beverages including carbonated drinks, enhanced waters, sports drinks and teas with the one-touch simplicity, quality and variety.
According to the company, its Keurig cold beverage system will meet a number of consumer needs:
- delivering the beverage cold versus ambient;
- offering a consistent and simple carbonation process at the touch of a button;
- enabling consistent and exact dosing of different levels of carbonation and flavoring;
- offering wide brand choice and variety; and
- being offered at an attractive price point similar to its Keurig hot platform brewer line-up, with a footprint suitable for a kitchen counter.
GMCR has seen tremendous growth in its topline and bottomline over the last 10 years. While the company’s topline has grown at a 10-year CAGR of 42%, its bottomline has increased by a CAGR of 56.70% during the same period. The following table shows the company’s revenue per share, earnings per share and other key metrics over the last three years.
Analysts seem to be positive about the company’s prospects and have a mean target price of $124 on the stock, which implies a 25% upside.
Keybanc's Akshay Jagdale, who has a target price target of $175 on the company, recently reiterated his overweight rating saying he expect the company’s sales and earnings to grow at a CAGR of 20% over the next five years. According to him, "a premium value is warranted," given Keurig's best in class growth prospects.
Canaccord Genuity analyst Scott Van Winkle also wrote a positive note on the company earlier this year, after GMCR entered into an agreement to buy back 5.2 million shares from Lavazza for $623.6 million or $119.18 per share. Van Winkle noted:
“The move helps remove an overhang following a period of stepped-up selling activity by Lavazza that appears M&A-driven. Following the deal, Lavazza will maintain a 3% stake in GMCR. Beyond the GMCR share repurchase from Lavazza at $119, Coca Cola recently took delivery of the remaining tranche of shares from its follow-on investment dating back to May priced at approximately $130 per share.”
I believe growth-oriented investors can consider buying GMCR after today's correction.
