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Keurig Green Mountain Shares Soar on Kraft DeaI

Zacks Research Staff

Keurig Green Mountain Inc. (GMCR), a maker of specialty coffee, coffee makers, teas and other beverages, has signed a deal with Kraft Foods (KFT), the second largest food and beverage company in the world after Nestle. 
Keurig and Kraft announced a multi-year licensing, manufacturing, and distribution agreement for Kraft’s branded coffees in Keurig portion packs that are used in Keurig’s commercial brewing systems. 

This announcement comes less than two years after Kraft said it would sell its own K-cup pods compatible with Keurig systems but not licensed to the company.

GMCR stock is currently trading at $134.16 up 13.94% in a positive reaction from the market on the company’s new agreement with Kraft.  The stock in the last two years had returned 422.67% and could be positioned for more growth after the agreement with Kraft.

“We hear time and time again that consumers consistently choose the Keurig brewing system for the quality, simplicity, value, and, most importantly, the variety of brands and beverages available in the system,” said Brian Kelley, Keurig's President and CEO. “Adding Kraft’s celebrated brands to the licensed Keurig family means Keurig consumers will be able to enjoy even more beverages they know and love with the quality and consistency they expect from their Keurig brewer.”

(GMCR) continues to post great growth numbers

Keurig Green Mountain has been public since the mid-1990’s, but most people have just started noticing them after their Keurig commercial brewing systems became well known.  The company is continuing its mission in partnering with companies who manufacture coffee components.  

In fact, a little over a month ago, Keurig announced a multi-year deal with the U.S. division of Nestle (NSRGY) under which Nestle’s coffee-mate branded coffee creamer will now available in K-cup packs for use in Keurig brewers.

In the last few years, the company has been signing several distribution agreements with major brands such as Dunkin Brands (DNKN), Peet’s coffee, J.M Smucker’s, and Starbucks Corporation. Keurig has increased its pace in partnering with major brands after its patents of K-cups expired in September 2012. 

With Green Mountain’s recent partnerships, it is indicating to investors that they are poised for growth in the foreseeable future, and that its K-cup system will continue to have a formidable place in the market. 

Keurig Green Mountain Financials

In the company’s most recent quarter, 3Q FY14, they reported net sales of $1.02 billion, up 6% from a year ago. Net income attributable to Keurig was reported at $155 million and EPS was reported at $0.99/share, beating consensus estimates by 13.79%.

Net sales for the third quarter of fiscal 2014 increased by $55.3 million, or 6%, to $1,022.4 million as compared to the prior year period. The 6% increase includes the unfavorable impact of foreign currency exchange rates which reduced net sales by approximately 1%.

The primary driver of the 6% increase in net sales for the third quarter of fiscal 2014 as compared to the prior year period was a $74.6 million, or 10%, increase in total portion pack net sales.  Portion pack products had the highest net percentage increase of 31% from same time last year. 

This could be attributed to the effort of increasing partnerships to brands such as Nestle and others over the course of the year.   This also indicates that portion packs are a significant attribute to the company’s revenue and signing another deal with Kraft is a positive sign in that category.

 “We are very pleased with our outstanding non-GAAP net income growth of 31%, which exceeded our long-term growth target. Our free cash flow performance also was strong at $127 million,” said Brian Kelley, Keurig’s President and CEO. “We delivered net sales of approximately $1 billion for the quarter, driven by 9 percent currency-neutral growth of our core single serve business.”

“Our solid year-over-year brewer shipment growth of 13% and our 15% unit growth in portion packs is indicative of the continued expansion of the Keurig system across the U.S. and Canada,” stated Kelley. “We also are excited about the imminent launch of our new Keurig 2.0 hot platform; the addition of formerly unlicensed and new brands to the Keurig hot beverage system during the quarter; and, our progress on the new Keurig Cold beverage system.”

Keurig Green Mountain Outlook

The company expects in fourth quarter fiscal year 2014 net sales to grow in the high single to low double digits and a diluted EPS in a range of $0.68 to $0.75. We currently have an EPS estimate of $0.78 for the current quarter which has been revised lower from where it was 60 days ago.

The company has also beaten earnings estimates by an average of 13.90%, indicating solid performance in the past year.  Although we have Green Mountain as a Zacks Rank #3 (hold) due to recent downgrade in earnings estimate revisions, investors should be on the lookout for what the company has in store next that could sway analysts’ minds on their earnings forecasts, and if this new Kraft deal will have an impact. 

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