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Does the Keurig Cup Decide Caribou's Fate?

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Are investors right to panic over Caribou Coffee's (NASDAQ: CBOU) recent Keurig cup downfall? Opinions regarding the recent struggle are mixed, but there is no doubt that CBOU is seeing increased competition in the K-cup category from Starbucks (NASDAQ: SBUX), Dunkin Brands (NASDAQ: DNKN) and Green Mountain Coffee Roasters (NASDAQ: GMCR).

Caribou's earnings have widely been on the up and up in recent months due to the popularity of the K-cup system. However, the coffee brewer is now experiencing moderated volumes that are slowing revenue growth and forcing analysts to question whether or not the buck can heed the disappointing outcome.

Research firms such as Jefferies and Dougherty & Company view the lack of increased revenue as a sign that investors should buy the stock. The worries appear to be overblown, with analysts at Jefferies more concerned about GMCR's stock difficulties.

"Stock has moved on K-Cup concerns, but we think it's a GMCR inventory issue that may take several qtrs to stabilize, and is not indicative of structural problems at CBOU. At current valuation <6.5x '13 EBITDA, we think CBOU is very attractive," Jefferies commented in a report this morning.

Troubles at GMCR are nothing new as of late; however, the company has definitely been robbing Caribou of its K-cup aroma. Green Mountain has sold Keurig Cup Portion Packs at an alarmingly increased rate over the years, with analysts at Trefis expecting profits to continuously increase through 2018.

The positive K-cup sales trend has not stopped the foundation from which GMCR sits to further implode. Several research firms have decreased the coffee roasters' PT and ratings over the past few weeks, as the company reported a detrimental quarter back in March from which it has not yet overcome.

Unfortunately for GMCR and CBOU, brands such as DNKN and SBUX are also looking to get a sip of the K-cup wealth these days. Dunkin Brands' same store sales are expected to climb due to many factors, but its recent launch of the Keurig brand is sure to be one of the driving forces behind increased revenue.

According to Morgan Stanley, Dunkin's K-cup sales will stabilize more so in the second year of the products' existence as the company plans on releasing promotions in the coming year. Thus far, K-cup has added ~2% to SSS for the doughnut distributor.

As for SBUX, the usual powerhouse brewer could be sweating the small stuff when it comes to the K-cup monopoly. With so many means of revenue for the coffee giant, (energy drinks, alcoholic beverages, etc.) it is inconceivable that the company may take a hit from decelerating K-cup sales.

"[We] believe a material deceleration in K-Cup sales could negatively impact our FY13E EPS for SBUX by ~3-4c (1-2%) and FY14E by ~7-8c (2-3%)," Deutsche Bank said in a recent report. "K-Cups are an important piece of the growth outlook for SBUX but not the only reason to own the stock (strong domestic and international retail businesses, other areas of CPG growth, cash flow). Also, a deceleration in K-Cup trends does not mean the business is completely going away."

With a product-driven heavy-weight competition well underway, it is up to promotional efforts made by each respective company to see who will burn the festering opponents first. It appears that DNKN is on the track to success, while GMCR, CBOU and SBUX are scrambling to strategize a fresh perspective on the K-cup rivalry.

CBOU is currently trading at $12.21, down 12.47% YTD, while DNKN is trading at $32.85., up 31.51% YTD. SBUX is trading at $54.04 today, up 17.45% YTD, whereas GMCR is trading at $24.69, down 44.93% YTD.

Latest Ratings for CBOU

Dec 2012DoughertyDowngradesBuyNeutral
Dec 2012Longbow ResearchDowngradesBuyNeutral
Dec 2012Stephens & Co.DowngradesOverweightEqual-Weight

View More Analyst Ratings for CBOU
View the Latest Analyst Ratings

Posted-In: Deutsche Bank Dougherty & CompanyAnalyst Color News Retail Sales Topics Analyst Ratings General Best of Benzinga


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