Shares of Green Mountain (GMCR) soared this morning after it announced that the company will be adding Starbucks (SBUX) coffee to its offerings. The Vermont-based coffee roaster, packager, and distributor has been expanding its line of K-Cup portion packs (the individual disposable cups of coffee used in Green Mountain's single-serve Keurig coffee machines) over the past year.
At this point, the company offers K-Cups for many brands, including its own Green Mountain Coffee, Folgers, Newman's Own, Caribou, and Wolfgang Puck. In addition, the company recently added Twinings of London, Celestial Seasonings, and Bigelow to its tea lineup. And to round out the product line, it has Ghirardelli hot cocoa as well as Green Mountain hot apple cider. There was some speculation last year as to if and when its main competitors would come onto the single-serve coffee scene. In February, the company announced a collaboration to add Dunkin' Donuts coffee to its lineup. And today's addition of Starbucks to its label leaves GMCR with a dominant foothold in this market.
This really appears to be a story of ``if you can't beat them, join them''. Green Mountain even teamed up with Breville (BVILF), Cuisinart, and Mr. Coffee to create other single-use coffee machines that utilize Green Mountain's technology and K-Cups portion packs that should further boost brand awareness. On the acquisition front, some of its new takeovers like Tully's and Timothy's expanded the Vermont-based coffee roasters geographic footprint out west and into Canada.
This most recent collaboration with Starbucks should quell fears that the Seattle-based coffee maker would step into Green Mountain's arena with its own single-use machine. And at this point, it appears as though Green Mountain has all its viable competitors as business partners. The new set-up and wider footprint should help to drive K-Cup volumes. In fact, we look for GMCR's bottom line to more than double this year, to $1.20 a share. And the stock offers above average appreciation potential through mid-decade.
The venture, meanwhile, should be modestly accretive to Starbucks' share earnings in fiscal 2012 (begins October 3rd). Indeed, we think it may add up to a nickel to share net next year, bringing the tally to $1.80, and around $100 million to $200 million to the top line. We are leaving our earnings call for this year at $1.50 a share, however, since the new Starbucks K-Cups will not be available to consumers until the fall. Longer term, the benefits of the GMCR deal are harder to judge, as not that many specifics were outlined by both companies. But it is fair to say, we think, that Starbucks will continue to aggressively push into the booming single-cup coffee market in the years ahead. It already has a success on its hands with the Via line of instant coffees and teas. We continue to recommend the high-profile issue as a 3- to 5-year play.
Finally, shares of Peet's Coffee & Tea (PEET) sold off sharply on this development. Presumably investors are concerned that today's announcement suggests some exclusivity that would preclude Peet's from selling its own K-Cup offerings down the road. From where we're sitting, that's not entirely clear. For the time being, we have left our top- and bottom-line estimates for Peet's as is until there is more information available. And we are maintaining our recommendation of above-average capital gains potential over the 3- to 5-year period.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.