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Can K-Cups Drive a Keurig Green Mountain (GMCR) Earnings Beat?

Zacks Equity Research

We expect specialty coffee maker Keurig Green Mountain Inc. (GMCR) to beat expectations when it reports third-quarter fiscal 2014 earnings results on Aug 6, after the market closes.

Why a Likely Positive Surprise?

Our proven model shows that Keurig Green Mountain is likely to beat earnings because it has the right combination of two key ingredients.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at 2.30%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.

Zacks Rank: Keurig Green Mountain currently has a Zacks Rank #3 (Hold). Note that stocks with Zacks Ranks #1, #2 and #3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and #5) should never be considered going into an earnings announcement.

The combination of Keurig Green Mountain’s Zacks Rank #3 and +2.30% ESP makes us very confident in looking for a positive earnings beat.

What's Driving the Better-than-Expected Earnings?

Keurig Green Mountain has been posting better-than-expected results in the trailing four quarters, with an average surprise of 11.74%, on the back of solid top-line improvement and enhanced operational efficiencies. This earnings streak is expected to continue in the third quarter as well.

Moreover, Keurig Green Mountain entered into several strategic alliances which should help it maintain a leading position in the single-serve brewing category. During the second quarter, Keurig entered into distribution agreements with popular coffeemakers like Nestle and Italy’s Lugi Lavazza to offer their popular coffee brands K-Cup packs that can be used on Keurig brewers.

These deals have enabled Keurig Green Mountain to align with major beverage brands to support a range of consumer choices and taste profiles under the Keurig Single-Cup Brewing system. Moreover, these alliances are expected to boost the company’s top line in the upcoming quarter.

In Jun 2014, Keurig Green Mountain entered into a distribution deal with Subway restaurants, which is also expected to boost sales. Per the agreement, the coffee maker’s new K150 brewer series will be installed at Subway restaurants across the U.S. thereby widening the homemade single-serve coffee options for Keurig users.

Sales are expected to further improve in the fourth quarter as the company is foraying into the world of cold beverage and soda with the launch of The Keurig Cold Machine scheduled in late 2014. In order to increase the brand power of the new machine, Keurig Green Mountain inked a 10-year partnership deal, in Feb 2014, with beverage giant, The Coca Cola Company (KO). Per the deal, Keurig Green Mountain will exclusively make Coca-Cola branded pods for the cold beverage system.

Other Stocks to Consider

Other food/beverage stocks that have both a positive Earnings ESP and a favorable Zacks Rank include:

Supervalu Inc. (SVU), with an Earnings ESP of +9.09% and a Zacks Rank #2 (Buy).

Wal-Mart Stores Inc. (WMT), with an Earnings ESP of +2.48% and a Zacks Rank #3.

Read the Full Research Report on GMCR
Read the Full Research Report on WMT
Read the Full Research Report on SVU
Read the Full Research Report on KO

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