SunTrust Slashes Keurig Green Mountain's Target, Calls For 'More Realistic Earnings Outlook'

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In a report published Monday, SunTrust Robinson Humphrey analyst William B. Chappell, Jr. maintained a Neutral rating on Keurig Green Mountain Inc GMCR, while lowering the price target from $95 to $70. The analyst believes that the stock would continue to be pressurized till the company provides "a more realistic earnings outlook."

"In our opinion, the company will need to address the share losses for its company-owned brands sooner than later, which will likely put pressure on earnings. Recall, GMCR-owned brands have lost 700bps of market share over the past year and posted a 5 percent sales decline in the most recent 4-week period according to Nielsen," Chappel stated.

The analyst believes that the company would need to increase promotional activity in the coming months, while finding ways to deal with its higher cost coffee hedges.

Related Link: Morgan Stanley: Keurig Green Mountain Continues To Be A Buy

"We are concerned that GMCR's aggressive push to win private label business has impaired the long-term profit model of the hot business. We have heard from several competitors that GMCR offered highly favorable terms to win over previously unlicensed businesses. We now worry that the legacy licensed partners will ask for improved economics when their contracts come up for renewal, if not before," Chappel mentioned.

Although the launch of Keurig Kold is one year away, the analyst believes that it could be difficult for the company to find consumers willing to pay the initial price of almost $300, as well as $5 for a 4-pack of Kold pods. The analyst also expressed concern regarding dilution due to this product.

According to the SunTrust report, "The question is: can the company cut the cost to manufacture by 30-50 percent so that it does not become highly dilutive at those lower price points? In our opinion, GMCR needs to rethink the entire Kold strategy but, with KO's $1.2B investment already in place, it may be too late to turn back."

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Posted In: Analyst ColorPrice TargetAnalyst RatingsSunTrust Robinson HumphreyWilliam B. Chappell
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