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Coca-Cola Perks Up Coffee Stocks

14 February 2014 in Trading Ideas

Isn’t it interesting how investing a little over a billion dollars tends to create a little attention?

Early last week, Coca-Cola announced it planned to buy a 10% stake in Green Mountain Coffee Roasters for $1.25 billion.

Green Mountain, you may know, is the maker of the ubiquitous Keurig single-serve coffee brewing machine that, for many, now constitutes the office coffee machine.

For Coke, you can probably see the strategy quite plainly – in addition to traditional merchant sales and vending machines, consumers will now be able to take part of their favorite Coke soft drink by way of Green Mountain’s forthcoming cold beverage machine, expected in 2015.1

 

This new device will allow people to make a Coke in the same way they now make coffee in Keurigs – by using a single-serving capsule or pod. The development now brings direct competition to Israel’s SodaStream, which sells soda flavorings and a machine that carbonates water.

The new cold-beverage Keurig will be able to make both carbonated and still drinks, meaning it can also be used for juices, sports drinks and tea.

For Green Mountain, the lift from Coke will bring it access to the company’s global distribution system as well as a wider variety of drinks.

As the Financial Times noted, Green Mountain estimates that each of the 120 million households in the US drinks 14 beverages a day. And while 13% of US households with a coffee maker own a Keurig, it’s still only used to make one to one-and-a-half drinks a day.

Euromonitor International analyst Jonas Feliciano told the FT that the Coke deal has a potential to be a “game-changer” for Green Mountain, giving it hope that it could soon be a major player in the $98 billion retail soft drinks mountain.

Investors certainly agreed. On the news of the deal, the stock jumped nearly 60%.

That liftoff has also helped drive the recent performance of the Caffeine Fix motif, where Green Mountain is the single-largest holding (26.3%). The motif is up 8.9% in the past month. During the same period, the S&P 500 has gained 0.2%.

Over the past 12 months, the motif has increased 41.3%; the S&P 500 has risen 22.3%.

It’s worth noting that Coke shares (a 13.6% weighting in the Caffeine Fix motif) are off a little more than 2% in the past month, which may have less to do with this deal than what’s been general large-cap stock sluggishness in 2014.

Coke, of course, faces its own obstacles as a maker of sugary drinks in a land that may be beginning to shun them. The FT reported that the company’s North American Shipments were flat for the first nine months of 2013.2

One could argue Coke also greatly needs this deal — and in fact some queried why the company just didn’t buy Green Mountain outright.

On the other hand, with a paper gain of $400 million already in hand from this deal, Coca-Cola may be playing with house money for a while.

1Shannon Bond, “Coca-Cola coming in a capsule,” FT.com, Feb. 5, 2014.

2Lex column, Coca-Cola: glass less than half full,” FT.com, Feb. 6, 2014.

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