Keurig Green Mountain Is Making Coke Look Good

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Green Mountain Commands Most Expensive U.S. Valuation
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One of this year's biggest winners on Wall Street is Keurig Green Mountain (GMCR). The stock was up 65 percent through the first half of 2014, a surprising spike for the leader in single-serve premium coffee, which was starting to see its growth decelerate.

The initial catalyst for Keurig Green Mountain's surge came in February when Coca-Cola (KO) paid $1.25 billion for a 10 percent stake in the company. Coca-Cola paid roughly $75 a share for the stock, and it paid a much higher price for more a couple of months later when it boosted its stake to 16 percent.

It's a significant development when the world's largest beverage company takes such a sizable stake in a niche player, but Coca-Cola's validation of the K-Cup champ has also made that investment more valuable. That initial $1.25 billion purchase is now worth more than $2 billion.

Given the meandering ways of Coca-Cola's own business -- analysts expect to see flat sales growth this year -- riding the coattails of a hot beverage company could be just the ticket to silence those skeptics reminiscing about Coca-Cola's glory years of heady growth.

The Mountain is Always Greener on the Other Side

Coca-Cola's investment isn't the only reason why Keurig Green Mountain has been percolating. Despite losing patent protection for its K-Cup portion packs two years ago, growing numbers of coffee brands and retailers are turning to Keurig Green Mountain to fuel single-serve initiatives.

BJ's Wholesale Club announced last week that it will have Keurig Green Mountain itself handle K-Cup production for BJ's private-label Wellsley brand. Keurig Green Mountain this week it revealed that it's teaming up with European giant Nestle (NSRGY) to introduce the first K-Cup to offer branded coffee and creamer in the same portion pack. Nestle Coffee-mate K-Cups will be available through Keurig's website in the fall and across retail outlets early next year.

Hot and Cold

Nothing trumps fears over expiring patents like the introduction of new technology with proprietary platforms -- and fresh patent protection clocks. Keurig Green Mountain will have two new product lines hitting the market in the coming months.

%VIRTUAL-article-sponsoredlinks%The Keurig 2.0 brewing system will offer a broader range of customization. It will also allow for pots of coffee to be made with portion packs. Coffee is still what the market associates with Keurig Green Mountain, and Keurig 2.0 is going to generate plenty of attention. Success is critical. Some of the companies turning to Keurig Green Mountain as their K-Cup partner may be doing so to make sure that their brands play nice with the new brewing platform.

At some point in Keurig Green Mountain's fiscal year starting in October, it will introduce Keurig Cold, its first machine to make cold and carbonated beverages on its own. That's possibly the biggest reason for Coca-Cola's investment.

Coca-Cola has already offered the support of its brands for Keurig Cold. Allowing people to make Coke, Diet Coke, Sprite and other pop flavors at home is a gamble for Coca-Cola, but one that's worth making when global sales of traditional canned and bottled carbonated beverages have stalled.

Motley Fool contributor Rick Munarriz owns shares of Keurig Green Mountain. The Motley Fool recommends Coca-Cola and Keurig Green Mountain. The Motley Fool has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our newsletter services free for 30 days.
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