The Keurig – Time to Pull Life Support?

The Keurig – Time to Pull Life Support?

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When will Green Mountain spend less time with lawyers defending their patents and more time filling our cups with our favorite Wake Me Up?

In September 2012, two of Green Mountain's patents governing cup design will expire. I guess its the best time for competitors to grab the audience with cheaper and better coffee.

U.S. supermarket chain Safeway (SWY) began selling its own brand of filtered coffee pods that are compatible with Green Mountain's Keurig brewers at prices below Green Mountain's own K-Cups.

Safeway is selling 12-packs of Safeway Select cups at $6.99, or 58 cents a piece versus 12-packs of Green Mountain K-Cups for $8.99, or 75 cents each. If you want to shop even cheaper, step into Costco (COST) and buy the OneCups at 32 cents each.

Green Mountain's Razer/Razerblade model – GMCR sells Keurig brewers at cost to acquire consumers and makes most of its profit from the patented K-Cup refills – is up for grabs!

So how painful really is the loss of the K-Cup patent? Well, over 80% of sales is generated from the K-Cup pod and the Keurig brewer. Meanwhile, there is growing competition from private label capsules that fit into the Keurig brewer. In addition, the stock is still trying to recover from the forecast cut from last quarter, criticism from David Einhorn for the company's accounting practice and lets not forget the dismissal of Robert Stiller (CEO) and William Davis (Lead Director) after selling GMCR stock in violation of company policies.

That being said, I wouldn't throw my Keurig away as yet. If not the K-Cup, you will be sipping another brand name capsule.

Lets look at the 4 big household names namely Green Mountain (GMCR), Starbucks (SBUX) Peets Coffee (PEET) and Dunkin (DNKN). One way of investment analysis will be to look at the Price to Sales and Price to Earnings ratio.

1. Green Mountain Coffee Roasters Inc. (GMCR, Earnings, Analysts, Financials): Engages in the specialty coffee and coffee maker business. Market cap at $3.13B, most recent closing price at $20.15. Price to Sales: 0.91. Price to Earnings: 9.7.

 

2. Starbucks Corporation (SBUX, Earnings, Analysts, Financials): Operates approximately 16,858 stores, including 8,833 company-operated stores and 8,025 licensed stores. Market cap at $39.69B, most recent closing price at $52.33. Price to Sales: 3.1. Price to Earnings: 30.7.

 

3. Peet's Coffee & Tea, Inc. (PEET, Earnings, Analysts, Financials): Operates as a specialty coffee roaster and marketer of fresh roasted whole bean coffee and tea in the United States. Market cap at $799.77M, most recent closing price at $60.36. Price to Sales: 1.9. Price to Earnings: 47.26.

 

4. Dunkin' Brands Group, Inc. (DNKN, Earnings, Analysts, Financials): Operates, and franchises quick service restaurants worldwide. Market cap at $4.19B, most recent closing price at $34.78. Price to Sales: 6.5. Price to Earnings: 28.54.

 

 

In the case of GMCR: 3-year annualized revenue growth is 75% and EPS growth is 89%. If you are a believer in the story, it is worth more analysis.

 

 

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2 Responses to “The Keurig – Time to Pull Life Support?”

  1. Andoring says:

    One question that I'm not clear on yet is "WHO" is producing k-cups for private labels? The stock went down after news that Safeway and Krogers were introducing private-label brands in their stores, but it's unclear who their supplier is going to be. Is it GMCR or some other manufacturer or the grocery chains themselves? On one side, if there are a bunch of other unnamed producers out there, GMCR's razor to razor-blade model is coming to an end, but if it's just GMCR suppling these guys (much like they're supplying Starbucks and Duncan Donuts now), well then I think they're going in the right direction in preventing "Razor competition".

    • KapitallWire says:

      Making the Keurig-compatible containers for Safeway is Rogers Family, a California-based manufacturer that doesn’t have a licensing agreement with Green Mountain and has been sued by the coffee maker for patent infringement. Rogers contends that design differences in its Keurig-compatible containers avoid infringing on Green Mountain’s patents.

      As far as Kroger is concerned, its not clear if it would manufacture the cups independently or through a licensing agreement with Green Mountain.

      Nestle, Kraft and Sara Lee are also planning to introduce their own K-Cups.

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