I love stocks that are down 40% on a year when they’re attached to companies with strong brands that keep earning more and more money. The name of the company that fits this criteria right now is Keurig Green Mountain (GMCR, Financial).
Keurig, founded in 1990 and headquartered in Vermont, is known for K-cups and the machines that use them. In 2014, the company sold 9.8 billion K-cups and grew the base of in-house U.S. brewers to 20 million households, launching the 2.0 version of their iconic system. This helped the company generate $4.7 billion in sales and $597 million in net profit.
Coffee is a massive market, and Kuerig still has a lot of room to grow. There are more than 120 million households and north of 30 million businesses just in the United States. The obvious goal is to get one of these in every household. Are there competitors? Sure, but like any brand that has the first mover advantage and leads the market, it will likely always have that edge.
Of course, the naysayers will point to slower profit growth. Well, it’s a multi-billion dollar company. Of course, they aren’t going to grow at 100% year over year. Let’s look at the basics like Ben Graham would.
2005 Financials
Sales: $162 million
Profit: $9 million
Book: $0.60
2010 Financials
Sales: $1.36 billion
Profit: $80 million
Book: $5.26
TTM Financials
Sales: $4.73 billion
Profit: $586 million
Book: $17.49
If the company kept up this level of growth for the next 10 years, it would be generating as much in net profit as Apple does right now. But there's no chance it could do that. However, that doesn’t mean that it can produce better than market rates of interest for shareholders that get in at this price.
At $78 it needs to trade above $156 in the next 5 years to generate 15% a year, which in my opinion will be better than the S&P 500. To get there, it just has to keep extracting profits from the increased sales. On November 18, 2014, the stock closed at $157.10. The question becomes: In the next 5 years, will they be doing more or less business than they do right now? More!
As for today's price, trading at 22 times earnings ($78.91 as of 1:56pm on June 25) makes owning the stock at these levels close to a no-brainer. Short term news and analysts may push the stock lower, even below $70, but the fair value of the company is closer to $100 and the future value of the brand carries considerable weight.
Could someone buy the company outright? Sure, at a $12 billion valuation, Coca-Cola or Starbucks could gobble up GMCR without much trouble, even paying 50% to 100% above the current market cap. Even P&G or Unilever would be well served to add K-cups and Kuerig machines to their lineup.
The point I’m trying to make here is that it’s a brand worth prizing. In fact, Coca-Cola bought over 6.3 million shares in February to add to the 2.8 million shares it bought last year. Of course, KO paid over $100 a share for its stake. This and a new partnership to spur innovation with K-cups makes this stock really undervalued right now.
For all the short term traders, an interesting fact on Keurig is that over the last 5 years, the summer has seen the stock produce an average return of 20.6% topping the list of S&P 500 stocks and showing a positive return each year since 2010.
