Keurig Green Mountain (GMCR)

Transcription

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Keurig Green Mountain (GMCR)
May 28, 2015
Price
Initiating Coverage at NEUTRAL: Pullback Warranted in
Light of Uncertain Hot, Cold Futures
$88.75
• Expectations reset, but Keurig 2.0 and Kold questions act as ongoing drag.
We believe expectations surrounding GMCR’s 2.0 platform and upcoming Keurig
Kold launch have been appropriately reset, but see limited visibility into incremental
opportunities of both at the present time. With noticeable incremental spending in
FY15/16 behind both, we believe GMCR is unlikely to experience meaningful
earnings acceleration that would justify a premium multiple to current levels.
• Keurig adoption rates continue to rise, but we believe growth is becoming
more difficult. A challenging FY15 holiday season for Keurig’s 2.0 launch showed
that the company may face headwinds bringing in incremental consumers to the
system at its current premium state of 4-6x per serving vs. bagged coffee. Keurig’s
recent launch of a lower-priced K250 is a step in the right direction, but does not
identify a meaningful solution to solving this conundrum. Furthermore, we are
concerned regarding long-term implications of unlicensed manufacturers. In
essence, we are concerned GMCR is overearning on K-Cup portfolio in relation to
its long-term expected annuity stream from its install base target.
• Operating costs and inflation likely to be headwinds in FY15 and FY16. GMCR
experienced a step-up in investments behind Keurig 2.0 in early FY15, and we
expect further incremental support for its Kold launch in 2H, both without true
upside potential. In addition, favorable coffee costs experienced over FY13/14 are
beginning to reverse, limiting potential gross margin improvements. GMCR
therefore appears set up to match or deleverage given slowing top-line growth.
• Keurig Kold presents more questions than answers. GMCR’s recent
announcement of a relatively “soft” holiday 2015 launch online, we believe, is
evidence of mixed progress in making a superior platform to current carbonated
beverage consumption. Based on launch timing, we don’t expect meaningful
accretion until FY17, when GMCR will ideally work towards integrating hot/cold
systems into one single-serve machine.
Rating
NEUTRAL
12-Month Price Target
$100
Phil Terpolilli
(212) 833-1367
[email protected]
Company Information
Shares Outst (M)
154.0
Market Cap (B)
$13.7
52-Wk Range
$88.01 - $158.87
Book Value/sh
$17.50
Cash/sh
$0.88
Enterprise Value (M)
$14.1
LT Debt/Cap %
16%
Company Description
Keurig Green Mountain, Inc. produces and
sells specialty coffee, coffeemakers, teas,
and other beverages in the United States
and Canada.
• Our price target of $100 implies GMCR shares trade below their 5-year
average. Broadly, we believe GMCR has some unique opportunities to grow over
the next 5+ years and has the characteristics of a company Coca-Cola would have
interest in (see page 2), but looking at the next 24-36 months, earnings growth may
prove difficult, and therefore, GMCR shares deserve a discount to prior averages.
FYE Sep
2014A
REV (M)
ACTUAL
CURR.
2015E
Q1 Dec
Q2 Mar
Q3 Jun
Q4 Sep
Year*
Change
$1,387A
$1,103A
$1,022A
$1,196A
$4,708A
8%
$1,386E
$1,127E
$1,044E
$1,309E
$4,866E
3%
EPS
ACTUAL
CURR.
$0.96A
$1.08A
$0.99A
$0.90A
$3.93A
23x
16%
$0.88E
$1.03E
$0.80E
$1.00E
$3.71E
24x
-5%
Healthy Lifestyles
2014A
Q1 Dec
Q2 Mar
Q3 Jun
Q4 Sep
Year*
P/E
Change
PREV.
2016E
CONS.
CURR.
$1,461E
1,152E
1,044E
1,225E
$4,783E
$1,544E
$1,250E
$1,172E
$1,308E
$5,275E
8%
CONS.
CURR.
$0.89E
1.05E
0.80E
0.98E
$3.69E
$0.90E
$1.20E
$1.04E
$0.97E
$4.12E
22x
11%
2015E
PREV.
PREV.
CONS.
$1,527E
1,267E
1,160E
1,386E
$5,366E
2016E
PREV.
CONS.
$0.98E
1.18E
0.92E
1.09E
$4.20E
Source: Thomson Reuters
Consensus estimates are from Thomson First Call.
* Numbers may not add up due to rounding.
Wedbush Securities does and seeks to do business with companies covered in its research reports. Thus, investors
should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors
should consider this report as only a single factor in making their investment decision. Please see page 20 of this
report for analyst certification and important disclosure information.
Investment Thesis/ Summary
We are launching coverage of Keurig Green Mountain (GMCR) with a NEUTRAL rating and $100 PT. We believe GMCR has
reached impressive scale in its legacy hot platform and will continue to grow adoption rates domestically in coming years.
Unfortunately, our concern is that long-term growth for Keurig’s legacy platform may fail to reach company adoption/usage targets
without negative changes to pricing structure. Furthermore, we remain concerned that Keurig has the most to lose as the dominant
share player in the hot category to unlicensed competitors, is facing materially higher gross and operating costs from rising coffee and
sales costs (behind launch of 2.0 and Kold platforms), and that we have minimal visibility into the true long-term market potential and/or
viability of GMCR’s upcoming cold beverage platform. Although shares have reset in light of these concerns, we believe GMCR will
face difficulty gaining positive momentum even at current valuation levels.
•
•
•
•
•
Keurig adoption rates continue to rise, but growth is becoming more difficult. Keurig sold over 10M single-serve coffee
brewers in FY14 (not including partner brewers), an impressive feat given the company estimated there were at least 17M
installed brewers domestically in September of 2013. We believe adoption is on track to slow meaningfully, and the Keurig’s
2.0 platform launch in its current state is likely to drive upgrading consumers, rather than incremental users, into the platform.
In total, we do believe GMCR can reach 30M+ domestic households (~24M currently, by our estimates) but still a far cry from
the 90M+ domestic households with some form of coffee brewer at present. By our math, we believe GMCR needs to capture
~24M households over the next 3.5 years to reach its targets laid out in 2013, which may be unrealistic at current price points
for K-Cups and Keurigs.
Keurig 2.0 seeing unlicensed portion pack entrants. Despite efforts to utilize proprietary technology and sign incremental
brand and private label partners, major unlicensed competitors to GMCR have found ways to manufacture and distribute 2.0compatible portion packs. If this direction continues to hold, we believe GMCR is at risk to face a more commoditized pricing
structure to its coffee K-Cup revenue stream over time. Most recently, GMCR’s November 2014 price increase was met with
steep resistance, as manufacturers across the industry have operated in a promotional environment over the last few months.
Operating costs, cost inflation likely material headwinds in FY15 for first time in several years. GMCR experienced a
step-up in investments behind Keurig 2.0 in early FY15, and we expect further incremental support for its Kold launch in 2H,
both without true upside potential. In addition, favorable coffee costs experienced over FY13/14 are beginning to reverse,
limiting potential gross margin improvements. GMCR profits therefore appear set up to match or deleverage slowing top-line
growth, and exclusive of D&A and G&A, we are forecasting unfavorable sales and cost of goods expenses.
Keurig Kold has some promise, but long-term concerns and questions linger for now. GMCR’s recent announcement
of a relatively “soft” holiday 2015 launch online, we believe, is evidence of mixed progress in making a superior platform to
current carbonated beverage consumption. Based on launch timing, we don’t expect potential accretion until FY17, when
GMCR will ideally work towards integrating hot/cold systems into one single-serve machine. We also have additional
concerns that GMCR may face difficulty reaching an initially high-end “choice” consumer on carbonated beverages, an
industry that has faced at least modest volume pressure. Last, GMCR is facing legacy competition from SodaStream and
other hot/cold beverage makers, as well as potentially B.Blend (Whirlpool, InBev offering), which launched a test recently in
Brazil. We view any competitive concerns as overblown for now given GMCR’s knowledge in single-serve marketing and point
to its success outperforming competitors with far greater resources (Tassimo, etc.) in single-serve coffee over the last ~10
years, although we are modestly concerned that SodaStream has already been purchased by avid carbonated soda drinkers
in the U.S., Keurig’s key market.
In total, earnings growth reacceleration looks unachievable in FY17. We believe consensus for an earnings
reacceleration in FY17 is overly optimistic based on the above factors. In particular, we believe Kold may not reach the critical
mass needed for meaningful accretion (likely 3M+ makers), while Keurig’s hot platform is likely to face increased price and
market share pressure from competitors, lowering overall profits. We walk through our financial assumptions in greater detail
on page 4.
Bottom Line: We believe GMCR’s recurring K-Cup revenue stream and recent product initiatives give the company a long-term
attractiveness to partner Coke (as an M&A/partner candidate similar to prior acquisitions and recent Monster stake), but in the
near/medium term, GMCR has pricing structure problems in the hot platform and a very uncertain outlook in cold beverages. If the
company’s pricing structure in K-Cups faces pressure and incremental costs associated with 2.0 and cold launches continue to
pressure margins, we believe GMCR deserves a discount to its historical valuations given unlikelihood of returning to double-digit
earnings growth in the near future.
Phil Terpolilli (212) 833-1367
Keurig Green Mountain | 2
Valuation
GMCR shares trade at a slight discount to their historical average in light of the company’s Coke agreement and long-term
Keurig Kold potential. GMCR shares trade at 24.0x and 21.4x FY15 and FY16 forward earnings, compared to their 26.6x 5-year
average and ~mid-20s average P/Es for comparable beverage growth peers MNST and SODA. However, since GMCR’s partnership
announcement with Coca-Cola on Keurig Kold in February of last year, the company’s shares have traded at the higher end of their
historical range at 25-40x. On a forward EV/EBITDA basis, GMCR shares trade at ~11.8x and ~10.6x our September-end FY15 and
FY16 estimates, respectively, versus the company’s 5-year TTM EBITDA average of ~18.2x.
Fluctuations in GMCR’s earnings growth as well as positive and negative news flow have driven noticeable swings in GMCR’s valuation
over the years. In 2012, GMCR decelerated noticeably from high-double-digit/low-triple-digit earnings growth in the previous two years,
while, most recently, the company alluded to the belief that following FY15/16 investment years, the company is likely to reaccelerate
earnings growth into the double-digit range in FY17 and beyond.
Our price target of $100 based on ~24x our FY15E EPS of $4.12 implies GMCR shares trade below their 5-year average.
Despite slowing growth, we believe Keurig Kold, likely reduced marketing spend by Keurig 2.0, and international growth should allow
GMCR to modestly accelerate earnings growth towards the end of FY16 into FY17, returning to low-double-digit rates. While certainly
not at the 40%+ growth experienced several years ago, we believe GMCR shares should trade just below their 5-year average given
long-term prospects behind the company’s potential incremental opportunity in carbonated beverages, recurring revenue stream in KCups, still increasing brand equity, and partnership with Coca-Cola.
Figure 1: GMCR Historical Valuation
70x
60x
Einhorn Raises
Acccounting and
Fundamental ?s
Coca-Cola Stake +
Partnership
Announced
50x
40x
30x
20x
10x
x
GMCR
MNST
SODA
Source: Thomson Reuters, Company data, Wedbush Securities, Inc.
Financial Summary
We are forecasting a revenue growth reacceleration in FY16 but almost entirely on incremental Kold sales. We are modeling
~3% revenue growth in FY15 to $4.866B, a deceleration from high-single-digit growth in FY14 and low-teens the prior year. Without
incremental growth in GMCR’s install base and lessened pressure from unlicensed offerings, GMCR may experience a similar stepdown in growth in FY16. We are modeling $5.275B in FY16 revenues or ~8% y/y growth (versus $5.366B consensus), but excluding
soda impact would equate to sub-5% growth. For FY17, we are modeling $5.863B (versus $6.251B consensus), assuming Keurig Kold
gains at least modest traction and reaches ~2-3M in total maker unit sales.
On the profitability front, we are forecasting compression of gross margin in FY15 of ~180 bps, followed by a ~110 bps decline in FY16
and a 70 bps decline in FY17. Our decline forecasts are based on a combination of expectation for higher coffee costs not fully offset
by pricing, increased promotional activity, and negative mix drag associated with brewer and soda maker sales. We are modeling EPS
of $0.80 in 3Q15 (in line with consensus), $3.71 in FY15 ($3.69 consensus), $4.12 in FY16 ($4.20 consensus), and $4.65 in FY17
($5.01 consensus). We believe factors to our below-consensus estimates in our years relate to below-average sales for hot platform,
higher than expected costs surrounding future beverage maker launches, and failure for meaningful Kold adoption rates in FY17.
Figure 2: GMCR Annual EPS Growth, FY07-FY17E (left), GMCR Revenues Assumptions (in millions, right)
$5.00
$4.65
$4.50
$4.12
$7,000
14%
$6,000
12%
$5,000
10%
$4,000
8%
$3,000
6%
$2,000
4%
$1,000
2%
$3.93
$4.00
$3.71
$3.40
$3.50
$3.00
$2.39
$2.50
$2.00
$1.63
$1.50
$1.00
$0.68
$0.50
$0.36
$0.12
$0.19
$0.00
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
$0
0%
FY13
FY14
FY15E
Single-Serve Packs
Brewers/Accessories
Kold (Machines + Packs)
Total Y/Y Growth
FY16E
FY17E
Other
Source: Company data, Wedbush Securities, Inc.
Risks
Risks to attainment of our price target include but are not limited to:
•
Better/worse-than-expected immediate adoption of Keurig Kold. GMCR alluded to a late FY14 launch of Keurig Kold, with an
initial runway more rapid than the legacy At-Home hot platform but still relatively small versus GMCR’s current Keurig Hot sales
rate. If Keurig Kold adoption and acceptance from consumers is better than anticipated, GMCR could seemingly ramp sales efforts
and generate better-than-expected earnings accretion as early as FY16. To the flip side, GMCR’s launch may face future pressure
from SodaStream and/or future launches of competing soda makers (Whirlpool’s drink maker, for example).
•
Surprising (positive or negative) spend behind Keurig 2.0 or Kold marketing and sales efforts. We are expecting a
noticeable step up in FY15 in costs as GMCR promotes both its Keurig 2.0 launch (spend up meaningfully y/y in 2014 Decemberend 1Q) and upcoming Keurig Kold launch. If GMCR were to get better- or worse-than-expected traction, this would materially
affect each platform’s outlook given its razor/razor blade model.
•
Valuation. Despite the recent pullback, GMCR shares still trade at a slight premium to their 5-year average. Given slowing growth
rates and uncertain Keurig Kold consumer adoption, we believe GMCR’s multiple has a risk of continuing to contract with visibility
towards an earnings reacceleration.
•
Input cost volatility. Although GMCR’s green coffee costs are mostly hedged for FY15, the company still holds longer-term risk
to fluctuations in coffee prices (which represent ~one-third of K-Cup COGS). Unfavorable or favorable rates may positively or
negatively impact GMCR given their ability or inability to pass along or hold pricing for K-Cups at retail.
•
Increased K-Cup competition from unlicensed portion packs. Despite efforts to successfully lock out single-cup competitors
with the Keurig 2.0 system, competitors have begun to manufacture 2.0 compatible cups. GMCR may face risk of future
commoditization and/or loss of branded and private label partner losses as a result.
Investment Merits
Keurig 2.0
Despite recent innovation, Keurig’s legacy hot platform may struggle to gain incremental adoption from current levels. Keurig
sold over 10M single-serve coffee brewers in FY14 (not including partner brewers), an impressive feat given the company estimated
there were at least 17M installed brewers domestically in September of 2013. However, we believe materially increasing Keurig’s
currently estimated 24M domestic household base may prove difficult. Despite below average penetration in certain domestic markets
such as San Francisco (under 10% penetration, well below nationwide ~25% penetration), Keurig still faces the challenge of driving
actual incremental middle income consumers into the system to achieve a larger share of the 90M domestic at-home coffee market.
Using a more realistic ~60-65M assumption of actual households that may purchase a brewer, 51M brewers sold lifetime and ~25M
estimated in service, we believe Keuirg would have to reach 24M total incremental households and sell roughly half to reach their target
over the next 3.5 years.
Figure 3: GMCR Brewer Sales Versus Estimated Install Base and Targeted Opportunity
160%
GMCR targeting ~36M brewer install base
by FY18 (~4M incremental brewers a year
from est. FY14 levels), or just under 8M
brewers sold a year including historical
attrition despite difficult y/y comparisons
140%
40000
Wedbush Estimated Math to
Reach Brewer Target:
35000
~51M brewer units sold lifetime
120%
30000
100%
25000
80%
20000
60%
15000
40%
10000
20%
5000
0%
60% or 30M units sold in
last 36 months
~25M estimated “active” in service
Assuming GMCR sold ~40M of
~60-65M households already likely
to purchase a Keurig brewer.
24M households left to try and
capture over next 3.5 years
0
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Install Base (Thousands)
Install Base Y/Y Growth
Y/Y Sales Growth
At least for now, Keurig 2.0 has not proved to be a silver bullet, but rather, an incremental expense. Despite material spending
behind Keurig 2.0, GMCR’s sell-through has disappointed investors, down double-digits on a y/y basis, and has faced substantial
criticism from customers. We believe this is attributable to:
1)
2)
3)
4)
Premium-priced 2.0 brewers still sold at a triple-digit dollar value. Despite a K-Carafe feature, we believe this generally was
perceived to be a poor value proposition to legacy consumers. Meanwhile, most consumers who had planned to purchase a
$150-200 brewer for themselves or as a gift had likely done so in past.
Unfavorable initial reviews related to the new machines not accepting unlicensed portion packs. 2.0 products received poor
review ratings on Amazon (as shown on following page) and other online retailers, likely further fueling skepticism among
consumers towards the benefits of upgrading or gifting.
GMCR accelerated marketing investments early in the launch cycle, according to surveys, with various coupons and other
rebates. The step-up in spend actually accelerated the negative impact of the first two points.
An impressive ~5M sell-through rate of Keurig 1.0 brewers in holidays 2014, which makes the 2015 season particularly difficult
as large batches of consumers had recently purchased Keurigs over the last 1-2 years.
Figure 4: K300 Amazon Front Page Reviews
Source: Amazon.com, Wedbush Securities, Inc.
Looking ahead, we see GMCR’s 2.0 conversion continuing to occur slower than expected, and not converting as many drinking
experiences as hoped. Low/mid income consumers may still face difficulty adapting a platform with even a $100-125 price point, given
GMCR has sold its legacy 1.0 platform at these levels for the last several years.
Figure 5: GMCR Changing Keurig 2.0 Strategy Per 2Q15 Call versus Wedbush Vantage Point
TACTIC
LAUNCH OF LOWER PRICED K250
MODELS ($119)
IMPROVED PACKAGING
COMMUNICATION (FOCUS ON BRAND
VARIETY)
REINTRODUCING MY K-CUP
ACCESSORY
BREWER ENHANCEMENTS (EASIER
HOT WATER DISPENSE, TEMP
CONTROL, ETC.)
INCREMENTAL PROMOTIONAL
PROGRAMS W/ RETAILERS TO LOWER
INVENTORY
WEDBUSH TAKE
1.0 platform also had ~$100-125 value-oriented brewer, therefore it will be tough to add incremental
consumers. Attachment rate unlikely to be similar to K350/450 models despite management comments
that reservoir adds differentiated factor versus Keurig Mini.
Wide range of clearly labeled Keurig-compatible K-Cups directly adjacent to brewers already sold at
many retailers.
May improve negative rating impact in online sector, but small portion of market unlikely to actually
improve Keurig machine sell-through.
Admittedly nice features, but no major innovations warranting upgrade cycle outside of K-Carafe, which is
featured on current 2.0 line.
May drive some incremental conversion, but at the expense of margin to GMCR in form of investment
costs.
Higher Costs / Overearning in Hot System?
Higher costs should limit GMCR margin growth in FY15 and likely FY16. On the gross margin front, ~one-third of GMCR’s K-Cup
cost profile is coffee costs, with the remainder divided between other inputs including labor, logistics, and other costs. With coffee costs
reversing over the last 12+ months, GMCR has begun to experience coffee input cost pressure, forcing them to raise pricing in early
November of 2014. Looking ahead, while the company is 95%+ locked in on coffee in FY15, these higher levels may continue to
pressure company volumes on premium-priced (and likely higher-margin) coffee branded items. We believe GMCR’s weak 2Q15
volume performance, after factoring in additionally signed K-Cup partners, was attributable to actual negative consumer elasticity from
recent pricing actions rather than weak Keurig holiday sell-through (since typically, Keurig sales are on a lag to material purchases).
Furthermore, incremental unlicensed companies have successfully entered Keurig’s 2.0 platform, which may further pressure overall
pricing structure. We are concerned premium price points of 4-6x for Keurig K-cups versus bagged coffee equivalents may be forced to
compress as additional incremental consumers enter into hot system (see prior section).
Figure 6: Coffee Composite Prices (U.S. cents/lb, left), K-Cup Segment Pricing Impact (right)
ICO - Composite Indicator
Thomson Spot "C" Price
2Q15
1Q15
-5%
4Q14
0%
3Q14
0
1Q15 pricing actions met
with heavy resistance
2Q14
5%
1Q14
50
4Q13
10%
3Q13
100
2Q13
15%
1Q13
150
4Q12
20%
3Q12
200
2Q12
25%
1Q12
250
4Q11
30%
3Q11
300
Successful FY11 pricing actions as
platform grows rapidly without
unlicensed competition
2Q11
35%
1Q11
350
-10%
Source: ICO, Thomson Reuters, Wedbush Securities, Inc.
Figure 7: GMCR Estimated Sensitivity to Coffee Costs, 2016E
K-Cup Coffee Costs
15%
K-Cup Revenues
4263
Other Revenues (Machines, Kold, 1012
etc.)
Consolidated Revenues
5275
Cost of Goods Sold
3219
Gross Profit
2055
10%
4263
1012
5275
3181
2094
5%
4263
1012
5275
3143
2132
4263
1012
5275
3104
2170
-5%
4263
1012
5275
3066
2209
-10%
4263
1012
5275
3028
2247
-15%
4263
1012
5275
2989
2285
Depreciation & Amortization
Selling & Operating
General & Administrative
Operating Profit
280
655
239
881
280
655
239
919
280
655
239
957
280
655
239
996
280
655
239
1034
280
655
239
1073
280
655
239
1111
Interest Income (Expense)
Other Income (Expense)
Pre-Tax Income
(6)
(8)
867
(6)
(8)
905
(6)
(8)
943
(6)
(8)
982
(6)
(8)
1020
(6)
(8)
1059
(6)
(8)
1097
Tax Rate
Noncontrolling Interest
Net Income
35%
(1)
563
35%
(1)
588
35%
(1)
613
35%
(1)
638
35%
(1)
663
35%
(1)
688
35%
(1)
713
Shares Oustanding
Diluted EPS
Forward P/E
155
$3.63
27.5
155
$3.79
26.4
155
$3.95
25.3
155
$4.12
24.3
155
$4.28
23.4
155
$4.44
22.5
155
$4.60
21.7
GMCR should also experience a negative mix from signed partners. On its most recent call, CEO Brian Kelly indicated the
company experiences some operating profit differences between partner pods into its legacy hot system, in contrast to GMCR’s
situation in late 2013 when the company was experiencing neutral impact from an operating profit perspective. To retain partners as
unlicensed manufacturers attempt to win back GMCR’s recently signed partnerships, we expect GMCR to have to continually offer
concessions to retain as many branded and private label partners as possible in 2.0. Therefore, in addition to top-line mix implications
of partner brand signings, we expect GMCR to suffer on the actual profit line from incremental brands signed over the last 12+ months.
Figure 8: Estimated GMCR K-Cup Portfolio Structure at Risk Without Profit Shortfalls
FY14
FY15/6
Notable Signed Partners
Target private label, Wal-Mart private label,
Peet’s, Kraft (Maxwell House, Gevalia)
Potential losses, likely on private label business
Estimated Share Won or Given Back
~8-10% of total K-Cup market
One-third of prior wins
Revenue Implications
Top-line growth, but not 1-for-1 given various
agreements (what portion of to-market process
retained by brand owner)
Negative top-line drag as Kraft deal phases out
in calendar 2015
Earnings Implications
Profit headwind, likely from forcing signings of
major players ahead of Keurig 2.0 launch
Concessions likely to lead to negative profit
implications
Incremental costs also should continue into future. Even with a soft launch of Keurig Kold, we expect meaningful spend from GMCR
behind both “getting it right” with Keurig 2.0 as well as its online-only Kold launch in holidays 2015 (1Q16). With incremental SG&A
spend, we therefore believe GMCR is set up to actually deleverage on the EBIT margin line in both FY15 and FY16, in contrast to
improving EBIT margin consistently over the last 5+ years.
Figure 9: GMCR Annual Operating Margin, FY10-FY17E
25%
20.9%
20%
18.6%
15.7%
16.1%
FY11
FY12
19.1%
18.9%
18.6%
FY15E
FY16E
FY17E
15%
11.3%
10%
5%
0%
FY10
FY13
FY14
Figure 10: GMCR Sensitivity to K-Cup Pricing, 2016E
K-Cup Pricing
K-Cup Revenues
Other Revenues (Machines, Kold, etc.)
Cost of Goods Sold
Gross Profit
-3%
4135
1012
5147
3104
2042
-2%
4178
1012
5190
3104
2085
-1%
4220
1012
5232
3104
2128
4263
1012
5275
3104
2170
1%
4306
1012
5317
3104
2213
2%
4348
1012
5360
3104
2256
3%
4391
1012
5403
3104
2298
Depreciation & Amortization
Selling & Operating
General & Administrative
Operating Profit
280
655
239
868
280
655
239
911
280
655
239
953
280
655
239
996
280
655
239
1038
280
655
239
1081
280
655
239
1124
Pre-Tax Income
(6)
(8)
854
(6)
(8)
897
(6)
(8)
939
(6)
(8)
982
(6)
(8)
1024
(6)
(8)
1067
(6)
(8)
1110
Tax Rate
Net Income
35%
(1)
555
35%
(1)
582
35%
(1)
610
35%
(1)
638
35%
(1)
666
35%
(1)
693
35%
(1)
721
Shares Oustanding
Diluted EPS
Forward P/E
155
$3.58
27.9
155
$3.76
26.6
155
$3.94
25.4
155
$4.12
24.3
155
$4.29
23.3
155
$4.47
22.4
155
$4.65
21.5
Keurig Kold
Long-term challenges to Keurig Kold reaching the critical mass success that GMCR’s legacy hot platform has attained. On
the one hand, a successful launch and adoption of Keurig Kold could generate sizable earnings accretion in FY16 and beyond for
GMCR, as our sensitivity analysis below indicates. However, we believe there are enough impediments/questions to the upcoming
Kold platform that without better visibility it’s difficult to expect GMCR’s Kold to reach the consumer acceptance levels of its legacy hot
platform. The primary impediments, we believe, are as follows:
Figure 11: Challenges for Kold versus Hot platform
Considerations
Keurig Legacy Hot System
Keurig Kold
Convenience
A)
brewed 1-cup substantially faster than traditional athome methods
A) will take 60 secs to deliver, versus “instantly” opening a can
of pop
B)
reduced waste for single cup users.
B) counterspace requirement versus refrigerator space
requirement
C) paying substantial price premium per serving on more
traditional soda offerings
Positives: A) “perfect” temperature and carbonation every
time vs resealable sodas, B) incremental variety in offerings,
C) less weight carrying pods home from store than soda
Cost (cups/pods)
4-6x more expensive than traditional drip methods on per
serving basis, half to one-fifth the cost of away from home
single-cups
Priced at $0.99-1.29 initially, a 2-4x premium to ready-to-drink
grocery carbonated soda mediums per serving and 3x cost “athome” soda making machines like SodaStream
Branding
Mostly fragmented industry
Two players make up dominant share (including GMCR’s
partner KO), private label less prevalent
Competition
A)
Compete(d) with several single-serve competitors
owned by large corporations (Bosch, Starbucks, etc.),
but generally competitor was small portion of large
CPG’s business
A)
Essentially one major competitor, SodaStream – entire
business model is built on sales of soda machines,
carbonation C02, and syrups
B)
Real competitor is classic at-home ready-to-drink soda
B)
Real competition was premium away-from-home coffee
Expectations for Keurig’s upcoming Kold platform have reset following its launch party. With many breadcrumb offerings from
GMCR since September 2013, following its May launch party for Kold, we now know the following key points:
1)
2)
3)
Timing: GMCR plans for a “soft” online-only launch in late FY15, followed a more meaningful launch at retail progressively
over FY16 and full nationwide roll out by holidays of that calendar year. This implies the machine’s ramp will be well below
bull expectations, with “hundreds of thousands of units” sold in year one.
Price: Keurig Kold’s retail price $299-369, pods $0.99-1.29 per serving. This compares to $80-200 for average Keurig hot
system brewers currently and $50-100 average price points for SodaStream makers domestically. On pods, this would equate
to a 3-4x approximate premium versus SodaStream, 12-pack and 2 liter soda offerings and a more modest 10-30% premium
versus single-serve PET.
Process: Machines use a patented system to create perfect temperature controlled soda in 60 seconds. Pods are recyclable
(unlike hot system K-Cups) and the system allows for identical carbonation each use. Pods have a 6-12 month shelf life, far
longer that of average hot K-Cups.
Based on now-released details, our major concerns, among others, include 1) the system will not be meaningfully accretive to GMCR at
current price points to consumers based on lower-than-expected consumption rates and install base growth, and 2) margin rates may
fail to reach levels seen in its recurring hot system K-Cup stream. For starters, assuming GMCR continues at a high-end price point for
at least one year, it may fail to reach material household penetration growth without substantial manufacturer price discounting.
Furthermore, GMCR’s plan to launch numerous in-house brands helping fuel consumer “choice”, a key proposition of the new system,
may face headwinds as the branded soda base spend includes substantial marketing costs in in-store promotional activity. GMCR may
therefore be forced to further accelerate price investments in an already expense-heavy new platform in cold beverages.
Figure 12: Estimated Key Variables to Keurig Kold Consumption versus Legacy System
Driver
Keurig Legacy Hot System
Keurig Kold
Servings Per “Active” Maker
~1.3
~0.75
Capturing a large portion of ~1.8 estimated daily
At-Home coffee occasions
Captures a far smaller portion of ~3.45 estimated
daily At-Home carbonated beverage occasions,
owing to price point and preparation time
~10-15% initial returns
~15% initial returns
~10% obsolescence (annually)
~10% obsolescence (annually)
~10% inactive/low activity brewers
~25% inactive/low activity carbonated beverage
drinkers
Blended Attrition of Existing Machines
Total Attrition Over 12-24 month time horizon:
Total Attrition Over 12-24 month time horizon:
30-35%
45-50%
Product Sales Given Initial Price Point
Gross Margin
$80-200 price range
$299-369 price range
Alternative shopping ideas: High-end blender,
High-end indoor grilling offerings
Comparable shopping ideas: Espresso Machine,
GoPro (holiday gift), various Stainless Steel
kitchen offerings, entry-level iPad
~50% (estimated)
~50%
Assumes similar margin structure to hot system
With limited visibility, we are forecasting approximately ~1M sales of soda makers in the first ~15 months of sales. We estimate ~0.75
beverages consumed per day, per maker, versus the ~3.5 carbonated beverage servings on average consumed by households (or
~5.5 including cold beverages without dairy). In terms of accretion, we are estimating dilution in both 4Q15 and FY16 as Keurig invests
behind Kold and experiences limited growth. Importantly, we believe key factors for Keurig Kold, namely consumption per maker and
actually sustainable gross margin, will not be materially visible until mid-FY17 at the earliest.
Other bull/bear considerations to the downside for Keurig Kold are as follows:
Figure 13: GMCR Bull/Bear Arguments
+ Carbonated beverage marketing at-home is far larger than coffee/hot
tea.
+ Keurig Kold will offer households more “choice” than having to buy
same 12-pack for entire family.
+ Further leverages “Keurig” name, offers incremental patent-protected
opportunity.
+ Further negotiating power with retailers.
+ Although other machines have limited success (SodaStream, Esio,
etc.) GMCR should be able to utilize far greater resources to market
product.
- “Custom” brands may be tough given plb penetration in rest of soda.
Custom brands in Keurig 1.0 drove product initially, this time around
brands are launching at same time.
- People were actually familiar before with hot system from office side of
business on 1.0.
- Small launch cycle may prove gaining critical mass from a marketing
standpoint difficult.
- Little discussion of how GMCR will be able to transition soda making
machine from a “premium” ~$300 product to a “mainstream” offering to
eventually increase household penetration.
- The market is small for soda and shrinking. High-end consumers are
less likely to drink many carbonated offerings versus coffee.
Company Background
Keurig Green Mountain is the dominant domestic single-cup coffee and brewer manufacturer. Waterbury, Vermont-based
Keurig Green Mountain was founded in the 1980s as a local specialty coffee establishment. The company began shipping its bagged
coffee product externally and held a partial ownership of “Keurig” coffee brewers in the early 2000s, before purchasing the full platform
in June 2006 and enhancing its focus on K-Cup sales for Keurig single-serve-coffee brewers. After purchase, from 2006-2010, GMCR
transitioned the Keurig platform from an office-coffee-platform concentrated mainly in the New England region to a national brand with a
wide range of home and office brewer offerings. Today, we estimate Keurig K-Cup and K-Cup-compatible machines are placed in ~20
million households and at least 1M away from home locations including hotels, offices, and foodservice locations. Product is featured
across a wide range of brick and mortar retail and online channels – in FY14, 10%+ customers include Costco (12% of sales) and WalMart (17%). Keurig brewers and K-cups for use in these machines now represent the lion’s share of GMCR revenues.
Figure 14: Estimated Keurig Brewer Install Base Growth, 2006-Present (left), FY14 Business Segment Mix (right)
25000
140%
120%
20000
Single Serve
Packs
77%
100%
15000
80%
60%
10000
Other Products
and Royalties
6%
40%
5000
20%
0
0%
2006 2007 2008 2009 2010 2011 2012 2013 2014
Units (Thousands)
Brewers/Access
ories
17%
Y/Y Growth
Figure 15: GMCR Hot Portfolio Key Historical Timeline
2006, May – GMCR purchase remaining interest in Keurig
2006-2009 – Triple-digit CAGR for Keurig coffee makers as GMCR sells Keurig in At-Home vs Away-From-Home channels
2010-2012 – ~50%+ CAGR in brewer sales and high-double-digit K-Cup sales growth
2012, Spring – Launch of Vue system, disappointing sell-through
2012, December – Key patents roll off for K-Cup technology
2013, September – Keurig indicates it estimates a ~16-17M install base, ~34M Keurig brewers sold lifetime.
2014 – Keurig begins to aggressively sign unlicensed portion pack manufacturers into GMCR system
2014, September – Keurig launches 2.0 system
Keurig’s portfolio comprises a wide range of both brewer and K-Cup offerings, and total SKUs has been even further enhanced over the
last 12 months with the introduction of previously unlicensed partner brands and K-Carafe and K-Mug packs for Keurig’s 2.0 system.
Today, Keurig has more than 500 hot beverage varieties across 70 brands and has nearly 20 varieties of hot beverage machines. The
hot beverage maker portfolio competes again machines such as Tassimo, Senseo, newly introduced “K-Cup compatible” systems such
as iCoffee, and to a lesser extent Nespresso systems. On the portion pack front, key coffee competitors include McCafe (manufactured
by Kraft), San Francisco Bay Coffee, and various branded and private label offerings manufactured by Mother Parker (private) and
Treehouse (THS).
Figure 16: GMCR’s Major Retail Hot Platform Offerings (Keurig.com pricing)
Keurig 1.0 MINI
Keurig 1.0 K45
Keurig 2.0 K250
Keurig 2.0 K350
Keurig 2.0 K450
Keurig 2.0 K550
$99.99
$119.99
$119.99
$149.99
$169.99
$199.99
Pricing
“Premium” – Starbucks, Peet’s, etc.
“Middle-tier” – Tully’s, Green Mountain Coffee, Caribou, Donut House,
etc.
Value-Level – Kirkland’s (Costco private label)
Sizing
K-Cups – Standard single-serve pack, available for all brewers
$0.40-1.10 per serving
K-Carafes – newly introduced 2.0 system, brew 3-4 cups
K-Mugs – introduced with 2.0 system, brews 12-16oz travel size
GMCR operates its Keurig business under a razor/razor-blade model, with Keurig brewers generally sold approximately to cost but KCups sold at a 50%+ gross margin. Typically, company K-Cups are sold at a sharp premium (4-6x) to traditional ground bagged coffee
used in drip brewers. COGS for GMCR on the K-Cup front are composed of coffee (~one-third+ as a % of COGS), packaging (~22%),
labor/overhead (sub-20%), distribution/logistics (sub-20%), and other costs (~sub-5%). GMCR employs a hedging strategy when
possible for coffee (which it sources from various key global regions including Africa, South America, etc.) and is almost locked in fully
for FY15. On the brewer front, we believe over the last couple years, Keurig made a modest profit off 1.0 brewers, but recently
released Keurig 2.0 brewers likely reverted the company towards break-even levels.
Figure 17: Keurig Estimated Gross Margin by Product, FY15/16E
60%
50%
40%
30%
20%
10%
0%
-10%
Management
Keurig is led by Coca-Cola veteran Brian Kelley and recently announced its upcoming CFO. President and CEO of Keurig is
Brian Kelley, a role he assumed in December 2012. Mr. Kelley previously served at Coca-Cola from 2007-2012, most recently as
President of Coca-Cola Refreshments, and as President and Chief Executive at SIRVA (North America Van Lines) and additional
senior leadership roles at Ford Motor Company and GE. Fran Rathke is current CFO at GMCR, a role she’s held since 2003, but
intends to step down from her role shortly and aid in a transition phase through September. Ms. Rathke will be replaced by Peter
Leemputte, who will fully take over in August. Mr. Leemputte served most recently as CFO of Mead Johnson Nutrition (MJN, Not
Rated) from 2008-2015, CFO of Brunswick (BC, Outperform) from 2003-2008 and numerous prior leadership roles at Chicago Title &
Trust, FMC (FMC, Not Rated), and Amoco.
Industry Background
Hot Coffee Beverages
Keurig successfully fended off single-serve brewer competitors such as Tassimo and Senseo over the last ten years, earning
a 90%+ share of the single-serve coffee industry. Following certain patent expirations, Keurig has seen a small portion of
incremental launches of third-party single-serve compatible products reach the marketplace, but with far less spending resources
versus GMCR. In overall coffee, we estimate industry revenues stand at ~$50B domestically based on Packaged Facts and National
Coffee Association data, comprising traditional bagged and single-serve coffee in “At Home” and “Away from Home” channels. In
contrast to soda, we estimate coffee consumption has actually grown domestically at an average low-single-digit y/y rate over the last
five years. As consumers have migrated towards single-serve platforms from drip, industry estimates from Packaged Facts estimate
that single-serve coffee now represents over 40%+ of the overall $10B+ At Home coffee industry.
Figure 18: Estimated Market Size of Coffee Domestically (in billions, left), Estimated Current Keurig Compatible Market Share
$60
Other GMCR
Licensed, 22%
$50
$40
Unlicensed
Portion Packs,
8%
Starbucks, 15%
Away from
Home (QSR,
Food Service,
etc.)
$30
$20
$10
SJM Brands
(Folgers,
Maxwell
House, etc.),
16%
At Home - K-Cup Systems
At Home Other
$0
2014E
GMCR Brands,
40%
Figure 19: Key Single-Serve Versus Bagged Differences – Market Share (left), Price per Serving (right)
100%
$0.90
90%
$0.80
80%
$0.70
70%
$0.60
60%
$0.50
50%
$0.40
40%
30%
$0.30
64%
$0.20
20%
$0.10
28%
10%
$-
0%
Roast & Ground Coffee
Top 5 Brands
Other Branded
Keurig System
Private Label
Bagged
Coffee Dunkin'
Bagged
Single-serve - Single-serve - Single-serve Coffee Private Label GMC French Starbucks Avg
Private Label
Avg
Vanilla
Avg
Source: Company reports, Wedbush Securities, Inc.
Cold Carbonated Beverages
With Keurig Kold, GMCR will be entering a $40B+ domestic carbonated beverage market. Carbonated beverages are an
approximate $40B+ market domestically, according to Beverage Digest, and for overall total cold beverage sales (ex-dairy), GMCR
estimates the market to be $50B+. GMCR’s competitor SodaStream (Not Rated) estimates the global market size of cold carbonated
beverages at $260B. However, unlike at-home domestic coffee consumption (shown above), the vast majority of soda is consumed via
ready-to-drink methods (PET, 2-liter, can, etc.), with SodaStream representing the largest portion of at-home carbonating methods but
with a sub-$100M in sales (<1% of market dollars). Despite partnerships with DPS and Coca-Cola to date, GMCR will still compete for
dollars in a highly competitive brand dominant category. GMCR has indicated it estimates roughly 3.45 carbonated beverages are
consumed at home per day or roughly 2x that of coffee, with Coca-Cola company brands maintaining a relatively-dominant 40%+
share.
Figure 20: Domestic Soda Market Dollar Consumption (in billions, left), U.S. Soft Drink Market Share (right)
$60
Dr. Pepper
Snapple, 17%
$50
Private Label,
5%
Other
RTD Tea/Coffee
Shelf-Stable
Juice
$40
Other, 12%
Bottled Water
$30
Sports & Energy Drinks
$20
Rfg Bev
$10
Carbonated
Beverages
Pepsi, 29%
Coca-Cola, 37%
$0
2014E
Globally, Keurig Kold could compete in a far larger market, with global carbonated beverages representing $260B+ in at-home
soda sales, according to SodaStream. Similar to Keurig hot, over time, GMCR may decide to participate in international markets,
particularly those with higher-than-average soda consumption. Major soda consumption countries outside of the U.S. and Canada
include Mexico, Germany, Australia, New Zealand, and the United Kingdom, as shown below.
Figure 21: Estimated Soda Consumption by Country, Liters per Capita
180
160
140
120
100
80
60
40
20
0
Figure 22: GMCR Financial Summary ($’s, in mm, ex-per share)
100
September year-end
2012
1Q13
2Q13
3Q13
4Q13
2013
1Q14
2Q14
3Q14
4Q14
2014
1Q15
2Q15
3Q15E
4Q15E
2015E
1Q16E
2Q16E
3Q16E
4Q16E
2016E
2017E
3859.2
1339.1
1004.8
967.1
1047.2
4358.1
1386.7
1103.1
1022.4
1195.6
4707.8
1386.4
1127.2
1044.4
1308.5
4866.4
1544.4
1250.2
1171.8
1308.3
5274.8
5863.1
Cost of Goods Sold
45.5%
15.6%
13.5%
11.3%
10.6%
12.9%
3.6%
9.8%
5.7%
14.2%
8.0%
0.0%
2.2%
2.1%
9.4%
3.4%
11.4%
10.9%
12.2%
0.0%
8.4%
11.2%
2402.1
863.0
532.7
496.7
609.9
2502.4
862.1
580.0
512.1
680.0
2634.3
859.7
604.0
570.9
779.4
2813.9
995.9
685.1
631.7
791.7
3104.4
3492.3
Gross Profit
1457.1
476.0
472.1
470.3
437.3
1855.7
524.6
523.0
510.3
515.6
2073.5
526.7
523.1
473.5
529.1
2052.5
548.5
565.1
540.1
516.6
2170.4
2370.8
-- Gross Margin
37.8%
35.5%
47.0%
48.6%
41.8%
42.6%
37.8%
47.4%
49.9%
43.1%
44.0%
38.0%
46.4%
45.3%
40.4%
42.2%
35.5%
45.2%
46.1%
39.5%
41.1%
40.4%
Depreciation and Amortization
187.7
56.9
56.9
62.7
59.8
236.3
60.6
65.6
65.7
65.8
257.6
62.6
64.3
64.8
74.6
266.2
61.8
70.0
71.5
77.2
280.5
296.4
Selling & Operating Expenses
469.9
171.8
124.8
136.7
127.1
560.4
168.2
125.0
127.9
140.5
561.6
176.5
136.3
141.0
145.2
599.1
202.3
152.5
153.5
146.5
654.9
713.1
General & Admin Expenses
179.7
56.8
67.9
65.2
59.8
249.6
61.3
60.6
73.5
72.8
268.2
57.9
64.5
67.9
69.4
259.6
63.3
51.3
64.5
60.2
239.2
263.7
Operating Profit
619.7
190.5
222.5
205.7
190.6
809.3
234.5
271.8
243.2
236.5
986.1
229.8
258.0
199.8
239.9
927.6
221.1
291.3
250.7
232.7
995.8
1097.6
-- Operating Margin
16.1%
14.2%
22.1%
21.3%
18.2%
18.6%
16.9%
24.6%
23.8%
19.8%
20.9%
16.6%
22.9%
19.1%
18.3%
19.1%
14.3%
23.3%
21.4%
17.8%
18.9%
18.7%
(23.0)
(5.7)
(3.8)
(3.9)
(4.7)
(18.2)
(2.6)
(3.0)
(2.4)
(3.6)
(11.7)
(1.1)
(0.3)
(2.5)
(2.3)
(6.2)
(1.5)
(1.5)
(1.5)
(1.5)
(6.0)
(4.0)
2.4
0.2
(2.4)
(5.7)
3.4
(4.6)
(5.6)
(4.6)
6.3
(7.3)
(11.2)
(5.5)
(5.1)
(7.0)
(1.0)
(18.6)
(2.0)
(2.0)
(2.0)
(2.0)
(8.0)
(5.5)
Pre-Tax Income
599.2
185.0
216.3
196.0
189.3
786.5
226.3
264.3
247.1
225.6
963.2
223.1
252.7
190.3
236.6
902.8
217.6
287.8
247.2
229.2
981.8
1088.1
Taxes Paid
217.9
68.4
74.6
70.6
53.0
266.6
80.3
94.6
83.5
77.8
336.3
78.8
86.7
61.7
78.1
305.2
76.2
100.7
86.0
79.8
342.7
380.8
-- Tax Rate
36%
37%
35%
36%
28%
34%
36%
36%
34%
35%
35%
35%
34%
32%
33%
34%
35%
35%
35%
35%
35%
35%
(0.6)
(0.4)
(0.2)
(0.2)
(0.2)
(0.9)
(0.2)
(0.2)
(0.2)
(0.2)
(0.9)
(0.1)
(0.1)
(0.3)
(0.3)
(0.8)
(0.3)
(0.3)
(0.3)
(0.3)
(1.2)
(1.6)
380.6
116.2
141.5
125.3
136.1
519.0
145.7
169.4
163.3
147.6
626.1
144.3
165.9
128.4
158.3
596.8
141.2
186.8
160.9
149.1
637.9
705.7
12.0%
Continued Net Income
-- Income Margin
9.9%
8.7%
14.1%
13.0%
13.0%
11.9%
10.5%
15.4%
16.0%
12.3%
13.3%
10.4%
14.7%
12.3%
12.1%
12.3%
9.1%
14.9%
13.7%
11.4%
12.1%
Non-Recurring Events
(18.0)
(8.2)
(9.1)
(9.0)
(9.2)
(35.5)
(7.5)
(7.3)
(8.2)
(6.5)
(29.5)
(9.6)
(10.4)
0.0
0.0
(20.0)
0.0
0.0
0.0
0.0
0.0
0.0
Reported Net Income
362.6
107.9
132.4
116.3
126.9
483.6
138.2
162.1
155.2
141.1
596.5
134.7
155.5
128.4
158.3
576.8
141.2
186.8
160.9
149.1
637.9
705.7
Basic Share Counted
155
149
149
150
151
150
149
154
163
163
157
162
159
157
156
159
155
153
152
151
153
149
Diluted Shares
159
153
152
153
153
153
152
157
165
164
160
164
161
160
159
161
157
156
155
153
155
152
Common Earnings Per Share
$2.46
$0.78
$0.95
$0.84
$0.90
$3.47
$0.98
$1.10
$1.00
$0.91
$3.99
$0.89
$1.04
$0.82
$1.01
$3.76
$0.91
$1.22
$1.06
$0.99
$4.18
$4.73
Diluted E.P.S. (Cont.)
$2.39
$0.76
$0.93
$0.82
$0.89
$3.40
$0.96
$1.08
$0.99
$0.90
$3.93
$0.88
$1.03
$0.80
$1.00
$3.71
$0.90
$1.20
$1.04
$0.97
$4.12
$4.65
47%
28%
45%
57%
39%
42%
26%
16%
21%
1%
16%
-9%
-4%
-19%
11%
-5%
2%
16%
29%
-2%
11%
13%
$2.28
$0.71
$0.87
$0.76
$0.83
$3.16
$0.91
$1.03
$0.94
$0.86
$3.74
$0.82
$0.97
$0.80
$1.00
$3.59
$0.90
$1.20
$1.04
$0.97
$4.12
$4.65
1394.0
Reported Diluted E.P.S.
EBITDA
EBITDA Per Share
Common Dividend
Dividend Per Share
807.4
247.4
279.4
268.4
250.4
1045.6
295.1
337.4
308.9
302.4
1243.7
292.3
322.3
264.6
314.5
1193.8
282.9
361.3
322.1
309.9
1276.3
$5.08
$1.62
$1.83
$1.76
$1.63
$6.84
$1.95
$2.14
$1.88
$1.84
$7.80
$1.78
$2.01
$1.66
$1.98
$7.43
$1.80
$2.32
$2.09
$2.03
$8.24
$9.19
0.0
0.0
0.0
0.0
0.0
0.0
37.9
39.4
41.2
41.1
159.5
47.2
46.2
45.9
45.6
184.9
47.1
46.7
46.4
45.9
186.0
200.1
$1.32
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.25
$0.25
$0.25
$0.25
$1.00
$0.29
$0.29
$0.29
$0.29
$1.15
$0.30
$0.30
$0.30
$0.30
$1.20
D&A Expenses (% of sales)
4.9%
4.2%
5.7%
6.5%
5.7%
5.4%
4.4%
5.9%
6.4%
5.5%
5.5%
4.5%
5.7%
6.2%
5.7%
5.5%
4.0%
5.6%
6.1%
5.9%
5.3%
5.1%
S&O Expenses (% of sales)
12.2%
12.8%
12.4%
14.1%
12.1%
12.9%
12.1%
11.3%
12.5%
11.8%
11.9%
12.7%
12.1%
13.5%
11.1%
12.3%
13.1%
12.2%
13.1%
11.2%
12.4%
12.2%
G&A Expenses (% of sales)
4.7%
4.2%
6.8%
6.7%
5.7%
5.7%
4.4%
5.5%
7.2%
6.1%
5.7%
4.2%
4.2%
6.5%
5.3%
5.3%
4.1%
4.1%
5.5%
4.6%
4.5%
4.5%
Payout Ratio
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
26.0%
23.2%
25.2%
27.9%
25.5%
32.7%
27.8%
35.7%
28.8%
31.0%
33.4%
25.0%
28.8%
30.8%
29.2%
28.4%
Free Cash Flow
Net Income
362.6
107.9
132.4
116.3
126.9
483.6
138.2
162.1
155.2
141.1
596.5
134.7
155.5
128.4
158.3
576.8
141.2
186.8
160.9
149.1
637.9
705.7
187.7
56.9
56.9
62.7
59.8
236.3
60.6
65.6
65.7
65.8
257.6
62.6
64.3
64.8
74.6
266.2
61.8
70.0
71.5
77.2
280.5
296.4
Managed Working Capital
(212.5)
Other
117.9
53.7
10.3
(147.9)
34.0
34.9
80.7
(38.5)
(384.7)
(307.5)
(22.2)
(52.6)
(10.5)
(304.7)
(390.0)
226.0
(33.2)
(13.3)
(364.2)
(184.6)
(65.7)
139.9
(148.0)
227.0
(21.8)
24.9
82.1
39.0
12.5
47.8
73.5
172.8
(32.7)
58.3
25.0
25.0
75.6
30.0
30.0
30.0
30.0
120.0
120.0
Cash From Operations
478
135
470
168
64
836
273
321
230
(104)
719
142
226
208
(47)
529
459
254
249
(108)
854
1056
Capital Expenditures
(401)
(102)
(47)
(42)
(42)
(233)
(61)
(58)
(103)
(116)
(338)
(100)
(135)
(94)
(118)
(447)
(108)
(88)
(82)
(92)
(369)
(410)
0
0
0
0
0
0
0
(39)
(38)
(41)
(118)
(41)
(47)
(46)
(46)
(179)
(47)
(47)
(46)
(46)
(186)
(200)
77
$0.48
33
$0.22
423
$2.78
126
$0.82
21
$0.14
603
$3.95
212
$1.40
223
$1.42
89
$0.54
(261)
($1.59)
263
$1.65
2
$0.01
44
$0.28
68
$0.42
(210)
($1.33)
(97)
($0.60)
304
$1.93
119
$0.77
121
$0.78
(245)
($1.60)
299
$1.93
446
$2.94
FCF Yield
0.5%
0.2%
2.8%
0.8%
0.1%
3.9%
1.4%
1.4%
0.5%
-1.6%
1.6%
0.0%
0.3%
0.4%
-1.3%
-0.6%
1.9%
0.8%
0.8%
-1.6%
1.9%
2.9%
Share Repurchases
(76)
(99)
(27)
0
(63)
(188)
(122)
(758)
(117)
(55)
(1052)
(81)
(837)
(50)
(50)
(1018)
(50)
(50)
(50)
(50)
(200)
(200)
0
(66)
396
126
(41)
415
89
(535)
(28)
(316)
(789)
(79)
(793)
18
(260)
(1115)
254
69
71
(295)
99
246
Dividends
Total FCF
FCF Per Share
FCF After Repurchases
Figure 23: GMCR Balance Sheet ($, in mm, ex-per share)
September year-end
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
Current Assets
Cash & Equivalents
Accounts Receivable
Inventories
Other Current Assets
Total Current Assets
PP&E
Intangibles
Keurig Investment
Other Assets
Total Assets
$242
92
137
67
538
136
36
0
104
814
$4
172
262
56
495
259
220
0
396
1,371
$13
310
672
136
1,132
579
529
0
958
3,198
$58
364
768
132
1,323
944
498
0
850
3,616
$260
468
676
117
1,521
986
435
0
819
3,762
$761
621
835
228
2,446
1,171
365
0
815
4,797
$225
545
907
325
2,002
1,360
340
0
1,100
4,801
$200
588
949
325
2,062
1,405
330
0
1,000
4,797
$233
568
833
325
1,959
1,377
330
0
1,044
4,710
Current Liabilities
Accounts Payable
Accrued Liabilities
Short-Term Debt
Other Current Liabilities
Total Current Liabilities
LT Debt
Deferred Taxes
Other Liabilities
Total Liabilities
77
36
5
6
124
73
27
0
224
139
74
20
5
238
336
93
5
671
266
135
7
64
471
471
0
343
1,286
280
171
10
59
520
467
270
97
1,355
312
242
15
28
597
160
253
116
1,126
411
306
21
105
843
141
203
152
1,339
449
335
10
33
827
125
175
175
1,301
380
300
10
48
738
105
175
254
1,272
340
300
10
48
698
113
175
212
1,197
Shareholders Equity
Common Stock
Additional Paid-in Capital
Retained Earnings
Treasury Stock
Other
Total Equity
4
451
137
0
(2)
590
13
474
214
0
(2)
699
15
1,500
412
0
(15)
1,912
15
1,465
771
0
10
2,261
15
1,387
1,252
0
(19)
2,636
16
1,809
1,688
0
(54)
3,459
15
2,100
1,600
0
(215)
3,500
15
2,300
1,750
0
(540)
3,525
15
2,500
1,450
0
(453)
3,513
Total Liabilities and Equity
814
1,371
3,198
3,616
3,762
4,797
4,801
4,797
4,710
LT Debt to Capitalization
11.0%
32.4%
19.8%
17.1%
5.7%
3.9%
3.4%
2.9%
3.1%
Book Value Per Diluted Share
Year-End Market Price
Price to Book
Market Capitalization
Enterprise Value
$4.91
$24
4.8
2,851
2,682
$5.07
$31
6.1
4,300
4,631
$12.60
$93
7.4
14,107
14,565
$14.22
$24
1.7
3,775
4,184
$17.25
$75
4.3
11,441
11,341
$21.68
$130
6.0
20,762
20,141
$21.77
$100
4.6
16,074
15,974
$22.74
$100
4.4
15,500
15,405
$23.17
$100
4.3
15,163
15,043
Days Inventory
Days Receiveable
Days Payable
65
35
42
69
38
44
145
40
57
123
35
45
101
41
47
112
47
55
107
38
53
110
41
44
98
39
40
Return on Equity
Return on Capital
Return on Assets
Working Capital
9%
8%
7%
414
11%
8%
6%
257
8%
7%
5%
660
16%
13%
10%
803
18%
17%
13%
924
17%
16%
12%
1,603
16%
16%
12%
1,175
18%
18%
13%
1,324
20%
19%
15%
1,261
Figure 24: GMCR Cash Flow ($, mm, ex-per share)
September year-end
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
$22
18
1
0
(54)
15
2
$54
23
2
0
(61)
20
38
$80
44
(7)
0
(186)
59
(11)
$201
82
(9)
0
(427)
154
1
$364
188
61
0
(212)
78
478
$483
236
(18)
0
34
100
836
$597
258
(53)
0
(308)
225
719
$577
266
25
0
(186)
91
773
$639
280
25
0
(155)
95
885
$706
296
25
0
(127)
95
995
(49)
0
0
0
(48)
(48)
0
(41)
(50)
(139)
(118)
1
(459)
52
(525)
(283)
1
(908)
3
(1,188)
(401)
138
0
(2)
(266)
(233)
0
0
7
(226)
(338)
1
0
(135)
(472)
(447)
0
(220)
0
(667)
(369)
0
0
0
(369)
(410)
0
0
0
(410)
(0)
34
0
6
0
5
44
(51)
(96)
0
395
0
93
342
132
145
0
9
0
13
298
(111)
334
0
981
0
(5)
1,200
(8)
(109)
(76)
12
0
8
(173)
(72)
(226)
(188)
30
0
45
(411)
(19)
0
(1,052)
1,389
(118)
54
253
(17)
300
(1,018)
15
(179)
65
(834)
(19)
0
(200)
15
(186)
75
(315)
0
0
(200)
15
(200)
85
(300)
0
0
0
0
1
3
1
1
1
1
Net Change In Cash
-- Per Share
(2)
($0.02)
241
$2.01
(237)
($1.72)
13
$0.09
40
$0.25
202
$1.32
501
$3.14
(727)
($4.52)
202
$1.30
286
$1.88
Beginning Year Balance
End Year Cash Balance
-- Per Share
3
1
$0.01
1
242
$2.01
242
4
$0.03
4
17
$0.11
17
57
$0.36
58
260
$1.70
260
761
$4.77
761
34
$0.21
34
236
$1.52
236
521
$3.44
2
(49)
0
(47)
(0.41)
38
(48)
0
(10)
(0.08)
(11)
(118)
0
(129)
(0.93)
1
(283)
0
(283)
(1.86)
478
(401)
0
77
0.48
836
(233)
0
603
3.95
719
(338)
(118)
263
1.65
773
(447)
(179)
147
0.92
885
(369)
(186)
329
2.12
995
(410)
(200)
385
2.54
Operating Activities
Net Income
Deferred Taxes
Equity in Keurig
Net Working Capital
Other
Cash From Operating Activities
Investing Activities
Sale of Assets
Acquisitions
Other
Cash From Investments
Financing Activities
LT Debt Repayment
Revolving Credit
Stock Repurchase
Stock Issuance
Dividends
Other
Cash From Financing Activities
Exchange Rates
Free Cash Flow
Cash From Operations
Dividends
Total FCF
FCF Per Share
Analyst Biography
Mr. Terpolilli is an Equity Analyst covering health-focused food and food retail stocks. Prior to Wedbush Phil spent seven years at
Longbow Research, covering the traditional food & beverage universe as an Associate Analyst and subsequently the healthy living food
universe as a Senior Analyst. He has a B.S. in Management from John Carroll University and is a 2015 Level III CFA Candidate.
Edge: A diversified coverage universe of food manufacturers, distributors, and retailer's helps give Mr. Terpolilli a more complete
understanding of important trends in the healthy living industry. He adds value through in-depth original fundamental analysis driven by
various channel checks and survey work.
Covered Companies Mentioned in This Report
Company
Brunswick
Starbucks
Ticker
BC
SBUX
Rating
OUTPERFORM
OUTPERFORM
Price Target
$63
$56
Price
$51.26
$51.77
Analyst Certification
I, Phil Terpolilli, certify that the views expressed in this report accurately reflect my personal opinion and that I have not and will not, directly or
indirectly, receive compensation or other payments in connection with my specific recommendations or views contained in this report.
Disclosure information regarding historical ratings and price targets is available at http://www.wedbush.com/ResearchDisclosure/DisclosureQ115.pdf
Investment Rating System:
Outperform: Expect the total return of the stock to outperform relative to the median total return of the analyst’s (or the analyst’s team) coverage
universe over the next 6-12 months.
Neutral: Expect the total return of the stock to perform in-line with the median total return of the analyst’s (or the analyst’s team) coverage
universe over the next 6-12 months.
Underperform: Expect the total return of the stock to underperform relative to the median total return of the analyst’s (or the analyst’s team)
coverage universe over the next 6-12 months.
The Investment Ratings are based on the expected performance of a stock (based on anticipated total return to price target) relative to the
other stocks in the analyst’s coverage universe (or the analyst’s team coverage).*
Rating Distribution
(as of March 31, 2015)
Outperform:55%
Neutral: 43%
Underperform: 2%
Investment Banking Relationships
(as of March 31, 2015)
Outperform:31%
Neutral: 3%
Underperform: 0%
The Distribution of Ratings is required by FINRA rules; however, WS’ stock ratings of Outperform, Neutral, and Underperform most closely
conform to Buy, Hold, and Sell, respectively. Please note, however, the definitions are not the same as WS’ stock ratings are on a relative
basis.
The analysts responsible for preparing research reports do not receive compensation based on specific investment banking activity. The
analysts receive compensation that is based upon various factors including WS’ total revenues, a portion of which are generated by WS’
investment banking activities.
Wedbush Equity Research Disclosures as of May 28, 2015
Company
Disclosure
Keurig Green Mountain
1
Research Disclosure Legend
1.
WS makes a market in the securities of the subject company.
2.
WS managed a public offering of securities within the last 12 months.
3.
WS co-managed a public offering of securities within the last 12 months.
4.
WS has received compensation for investment banking services within the last 12 months.
5.
WS provided investment banking services within the last 12 months.
6.
WS is acting as financial advisor.
7.
WS expects to receive compensation for investment banking services within the next 3 months.
8.
WS provided non-investment banking securities-related services within the past 12 months.
9.
10.
11.
12.
WS has received compensation for products and services other than investment banking services within the past 12 months.
The research analyst, a member of the research analyst’s household, any associate of the research analyst, or any individual
directly involved in the preparation of this report has a long position in the common stocks.
WS or one of its affiliates beneficially own 1% or more of the common equity securities.
The analyst maintains Contingent Value Rights that enables him/her to receive payments of cash upon the company’s meeting
certain clinical and regulatory milestones.
Price Charts
Wedbush disclosure price charts are updated within the first fifteen days of each new calendar quarter per FINRA regulations. Price charts for
companies initiated upon in the current quarter, and rating and target price changes occurring in the current quarter, will not be displayed until
the following quarter. Additional information on recommended securities is available on request.
* WS changed its rating system from (Strong Buy/Buy/Hold/Sell) to (Outperform/ Neutral/Underperform) on July 14, 2009.
Please access the attached hyperlink for WS’ Coverage Universe: http://www.wedbush.com/services/cmg/equities-division/research/equityresearch Applicable disclosure information is also available upon request by contacting Ellen Kang in the Research Department at (213) 6884529, by email to [email protected], or the Business Conduct Department at (213) 688-8090. You may also submit a written request
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RETAIL AND CONSUMER
TECHNOLOGY, INTERNET, MEDIA & SOCIAL MEDIA
HEALTHCARE
Communications & Cloud Infrastructure
Scott Thompson
(212) 938-9933
Gregory Nep, CFA
(212) 938-9942
Biotechnology/Biopharmaceuticals
David M. Nierengarten, Ph.D.
(415) 274-6862
Dilip Joseph
(415) 273-7308
Robert Driscoll, Ph.D.
(415) 274-6863
Healthy Lifestyles
Phil Terpolilli
(212) 833-1367
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Sean Wagner
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(212) 938-9954
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Taryn Kuida
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(415) 263-6626
(415) 273-7304
Healthcare Services - Managed Care
Sarah James
(213) 688-4503
(213) 688-4474
(213) 688-4343
Financial Technology
Gil B. Luria
Aaron Turner
(213) 688-4501
(213) 688-4429
Internet: Media and Gaming
Michael Pachter
Nick McKay
Alicia Reese
(213) 688-4474
(213) 688-4343
(212) 938-9927
Media
James Dix, CFA
Aria Ertefaie
(213) 688-4315
(212) 938-9958
Movies and Entertainment
Michael Pachter
Alicia Reese
Nick McKay
(213) 688-4474
(212) 938-9927
(213) 688-4343
Semiconductors
Betsy Van Hees
Ryan Jue, CFA
(415) 274-6869
(415) 263-6669
(213) 688-4470 / (800) 444-8076
(415) 274-6800
(212) 938-9931
(617) 832-3700
(213) 688-6671
(213) 688-4418
Heather Behanna, Ph.D.
Alison Macleod, Ph.D.
EQUITY TRADING
Los Angeles
San Francisco
New York
Boston
Milwaukee
CORPORATE HEADQUARTERS
1000 Wilshire Blvd., Los Angeles, CA 90017-2465
Tel: (213) 688-8000 www.wedbush.com
Medical Devices
Tao Levy
(212) 938-9948
Medical Diagnostics and Life Sciences Tools
Zarak Khurshid
(415) 274-6823
(213) 688-4470 / (800) 421-0178
(415) 274-6811
(212) 344-2382
(617) 832-3700
(213) 688-4475

Keurig Green Mountain (GMCR)

Transcription

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