Keurig: Coffee to Cola?

06/23/2014 7:00 am EST

Focus: STOCKS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

Once upon a time, says Mike Cintolo, this featured stock idea was a little coffee brewer in Vermont with a knack for growth; now it is a giant that is partnering with many of its rivals. Here's the latest from the growth stock expert and editor of Cabot Top Ten Trader.

Earlier on, it was thought the most likely fate for Keurig Green Mountain (GMCR) was that it would get swallowed by coffee giant Starbucks (SBUX).

Instead, Green Mountain became a giant in its own growing niche by buying single-serving technology company Keurig in 2006, and it's been doing deals ever since.

2011 saw it partner with rivals Starbucks and Dunkin' Donuts (DNKN), and it just recently convinced Subway to place Keurig brewers in all its shops.

But the biggest deal came earlier this year, when Keurig Green Mountain announced it would partner with Coca-Cola (KO) to develop and market single-serving cold beverages. Since then, Coca-Cola has become Keurig's biggest shareholder, with 16% of the stock.

With US carbonated soda sales falling, Coca-Cola needs the diversification into the caffeinated world, while Keurig benefits from Coke's distribution, as well as its product development arm.

Today, Keurig gets 73% of its revenue from selling portion packs of coffee and tea, which is great recurring revenue (it pays a dividend of 0.8%), but years from now, a large portion of that recurring income will come from other beverages. Management here is not to be underestimated!

When the Coca-Cola deal was announced in early February, GMCR gapped up from $80 to $100; two weeks later, it hit $124. The spring market correction brought the stock down to 90, which was painful for everyone who bought after the news.

But the news that Coca-Cola had increased its stake revived the stock, and since then, the stock has been banging its head on resistance at $124. Eventually, it should break through, so buying here is recommended. Keep a stop in the mid-$100s.

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