Wedbush Slashes Keurig Green Mountain Target By $15

In a report issued Monday, Wedbush analysts Phil Terpolilli and Dominic Ruccella reiterated a Neutral rating on shares of Keurig Green Mountain Inc GMCR, while trimming their price target from $100 to $85. The target implies more than 20 percent upside potential.

“On the one hand, continued pullback in increasingly out-of-favor GMCR shares is beginning to look overdone in light of the improving coffee cost outlook and ongoing adoption (albeit slowing) of single-serve coffee,” the note explained.

The recent decline in coffee costs, even amid reinvestment in pricing and other areas, could help the company generate $0.15 to $0.20 in additional earnings over fiscal 2016, the analysts believe.

Nonetheless, they think the current discounted valuation is justified by the limited potential for meaningful earnings growth reacceleration, as operating costs, a “successful entrance of unlicensed competitors into 2.0” and Keurig Kold remain concerning issues.

Furthermore, the note highlighted the increasingly negative spreads at Keurig Green Mountain. “At the low-end, spreads between GMCR-owned brands and value-oriented private label cups widened and at the high-end the price gap between owned brands and licensed and unlicensed premium portion packs narrowed,” the analysts said. To them, this means that the company will likely continue to feel increased top-line pressure from this negative mix.

Wedbush’s estimates were updated to better reflect the aforementioned volume trends and top-line pressure. The firm now anticipates earnings of $3.71 per share for fiscal 2015, $0.03 above consensus, and earnings of $4.12 per share for fiscal 2016, in line with the Street.