Chart of the Day – $GMCR: Caffeine Fix

by Enis October 7, 2014 2:38 pm • Chart of the Day• Commentary

Not all self serve beverage stocks are created equal.  At the same time that SODA is down to new all-time lows today after a big drop in sales and profit guidance, GMCR is hitting new all-time highs today.

GMCR was initiated as a buy this morning at Goldman Sachs, with the analyst summarizing the positives to the story as follows:

We see GMCR entering a period of accelerating sales and EPS growth in the coming years. We forecast a sales CAGR of 29.6% and EPS CAGR of 23.2% from FY14E-FY17E: (1) Single serve coffee growth far from over – We see household penetration of GMCR’s single serve coffee platform more than doubling to 50% by 2020 from a current 23%; (2) Expect sizable contribution from Cold platform in the coming years – The addressable market for Cold could be 4-5X larger than the Hot platform. Our proprietary consumer survey shows a 50% purchase intent for the Cold system, and the announced Coke partnership brings proven brands into the system immediately. (3) FY15 is likely to be an investment year, but we expect margins to stabilize in FY16/FY17 – 2015 is likely setting up to be an investment year as the company rolls out both Cold and its 2.0 platform.

Point 2 is what caught my attention.  The “Cold” platform is similar to SodaStream’s existing product, which has clearly been unsuccessful in growing over the past couple of years.  Later in the report, the GS analyst did acknowledge this potential negative implication:

We acknowledge that Sodastream remains a niche product; however, the lack of a comprehensive brand portfolio has likely impaired the platform’s entry into mass market status.

Perhaps that is the case.  Or perhaps the addressable market for Cold is not in fact 4-5X larger than the Hot platform.  To me, that argument is the crux of the bullish thesis, and my personal view is that SodaStream’s failure indicates a much more difficult long-term growth opportunity than currently implied by GMCR’s valuation.

Having said that, Coca-Cola’s announcements of increased stakes in GMCR (first 10% in February, then up to 16% in May) have spurred the stock on to a 84% gain so far year-to-date.  Many investors have bought GMCR on speculation that Coke will eventually just buy all of Green Mountain.

The stock’s advance to new highs this year has come after an incredible recovery in the shares from the mid-2012 low below $20:

GMCR weekly chart, courtesy of Bloomberg
GMCR weekly chart, courtesy of Bloomberg

The move above the 2011 high of around $116 has held in the past few months.  While the bulk of the stock’s gains in 2014 have been the result of the two Coca-Cola gaps, the stock most recently moved above the $128 resistance level after announcing a new licensing deal with Kraft in late August:

GMCR daily chart, 200 day ma in yellow, courtesy of Bloomberg
GMCR daily chart, 200 day ma in yellow, courtesy of Bloomberg

That level has held as support since the gap higher, and the stock is making a new high today.  Given that GMCR has moved so much on headline-induced gaps, it’s a bit surprising to see implied volatility near 2 year lows:

GMCR 30 day implied volatility, courtesy of Bloomberg
GMCR 30 day implied volatility, courtesy of Bloomberg

This is the type of name where using options to gain exposure, either long or short, likely makes sense given the relatively cheap options pricing.  We don’t have a strong view on the name, but GMCR has been quite a mover in the past year.