Goldman Sachs Analyzes Keurig Green Mountain's Bear Thesis, Offers Defense

In a report published Friday, Goldman Sachs analyst Judy Hong defended Keurig Green Mountain Inc GMCR, noting that after analyzing the bear thesis, "asymmetric upside risk" does exist, but shares at its current price offer a "compelling investment opportunity" for long-term investors.

Shares of Keurig have been under pressure due to concerns around a slowing installed-base growth, market share losses for its own k-cup pods resulting in gross margin declines and "skepticism" around its cold-beverage ("KOLD") machine, which might "flop."

Installed Base Could Still Grow

According to Hong, there is still room for the installed base to continue growing based on several factors:

• 1) A 22 million installed base points to "only" 25 percent penetration rate of total coffee brewer ownership
• 2) Poor holiday sales last year is likely to be transient
• 3) Regional analysis suggests the market could grow in under-penetrated regions
• 4) With price being the largest constraint to single-serve coffee brewer ownership, Keurig's launch of its K200 and K250 models should be a "positive."

• 1) A 22 million installed base points to "only" 25 percent penetration rate of total coffee brewer ownership
• 2) Poor holiday sales last year is likely to be transient
• 3) Regional analysis suggests the market could grow in under-penetrated regions
• 4) With price being the largest constraint to single-serve coffee brewer ownership, Keurig's launch of its K200 and K250 models should be a "positive."

Related Link: Keurig Green Mountain Being Defended At Goldman Sachs

Margins Won't Collapse

Hong also noted that Keurig could implement new cost savings initiates in the coming quarter, which could further "cushion" margins in fiscal 2016.

KOLD Won't Freeze Over

Finally, Hong did acknowledge Keurig's KOLD investor day in May was met with "disappointment," given a higher-than-expected launch price of the machine ($299 to $369) and pods ($0.99 to $1.29) and a slower-than-expected national retail launch.

The analyst agreed that the ramp-up is likely to be slower than expected, but the price points are likely to come down over time. The analyst also noted that investor expectations have been set lower and, as such, any signs of KOLD gaining traction will be a positive.

Estimate And Price Target Changes

Hong lowered her fiscal 2015 earnings per share estimate by around 5 percent to $3.53, while introducing a new fiscal 2016 earnings per share estimate of $4.00.

Shares remain Buy rated with a price target lowered to $120 from a previous $133.