2 Analysts Pile On Keurig, While 2 Others Take Long-Term View

Despite a negative investor reaction to Keurig Green Mountain Inc’s GMCR earnings report Wednesday, analysts at Morgan Stanley and UBS believe that near-term challenges will be outweighed by the longer-term opportunity. Bank of America analysts disagree. Shares of Keurig opened more 7 percent lower at $112.30.

Morgan Stanley and UBS have lowered their price targets, but still hold Overweight and Buy ratings on the stock with price targets of $155 and $168, respectively.

UBS analysts said that while EPS came in just $0.01 shy, brewer volumes (-12 percent) were the “main source of disappointment.” The analysts find it constructive that nearly half of Q1 brewer sales were to new users, though sales for the FY are off to a slow start.

Morgan Stanley said that it agrees that Keurig can expand penetration in hot products, given its “dominant market share and R&D pipeline.” Morgan Stanley prices the stock with a valuation of 12.5x 2016 expected EV/EBITDA with an added $34 per share in value for the cold products, launching this September.

Bank of America and Stifel analysts are much more concerned.

Bank of America slashed Keurig's price target by $30 to $130, noting that it is “imperative for GMCR to reverse the weakness.” The analysts mention they will pay close attention to the course correction and whether consumer perceptions change, while looking at potential profits from the cold products into the remainder of the year.

Stifel analysts maintained a Hold rating without a price target. Mark Astrachan noted that “slowing sales growth is notable for two main reasons.” First, adoption of Keurig 2.0 is underwhelming. Second, organic sales that excludes new licensing deals will grow at 0-1 percent. This is decelerating from high single-digit growth in FY2014.

The runway for the company is likely to be short. As UBS put it, “it’s simple: GMCR must deliver.”