Consumer Products

What Scares This Analyst the Most About Keurig Green Mountain

Keurig Green Mountain Inc. (NASDAQ: GMCR) has come on the scene as a specialty coffeemaker, and other companies and analysts alike took notice in recent years. After the Coca-Cola Co. (NYSE: KO) stake, there was even more interest. Unfortunately, Keurig Green Mountain has run into some very serious issues ahead of its next growth initiative. The independent research firm Argus has keyed in with some concerns about the company ahead of its KOLD launch, and it sees some big risks ahead.

Argus downgraded Keurig Green Mountain to Hold from Buy on weaker near-term outlook for a few reasons. First, Keurig has posted weak sales so far in the 2015 fiscal year, and the company recently cut its full-year guidance.

Looking forward, Argus expects difficulties with the Keurig 2.0 brewer to hurt sales of beverage pods, and it looks for the company to face pressure from price cuts on the pods that it manufactures for Starbucks and Kraft. At the same time, the firm expects higher coffee costs, spending on the new KOLD brewing system and Keurig 2.0 markdowns to weigh on earnings in the near term.

As a result, Argus lowered its fiscal 2015 earnings per share (EPS) estimate to $3.90 from $4.32 and its fiscal 2016 estimate to $4.40 from $4.95. Keurig appears fairly valued at 22.9 times the fiscal 2015 forecast and at 20.3 times the fiscal 2016 estimate.

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On May 14, Keurig unveiled its Keurig KOLD brewer, which allows users to produce carbonated drinks, juices, waters, sports drinks and teas at home. The new brewer will retail for $299 to $369. The pods will be priced at $0.99 to $1.29 per serving and come in packages of four. The Keurig KOLD is expected to be launched this fall through Keurig.com, followed shortly by sales at a select group of retailers. The system will be offered at more retailers in 2016 and will be available nationwide by Thanksgiving 2016.

On May 6, the company reported fiscal second-quarter net sales of $1.13 billion, up 2% from the prior year, as sales of pods rose 7% to $957 million. However, sales of Keurig brewers fell 23% to $106 million and revenue from “other products and royalties” fell 5% to $64 million.

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