Keurig Green Mountain May Face Pressure In 2016, But Morgan Stanley Says Don't Freak Out

• Keurig Green Mountain Inc GMCR shares have decline 61.25 percent year-to-date, hitting a low of $40.50 on November 18.
• Morgan Stanley’s Matthew Grainger has maintained an Equal-weight rating on the company, with a price target of $55.
• Although the risk-reward profile appears balanced, Grainger expects the company’s near-term results to continue to be pressured by increased promotion and mix headwinds.

Analyst Matthew Grainger also expects to see persisting uncertainty related to the company’s long-term margin profile, although the guidance indicates “relatively stable Hot earnings in F16.”

Keurig Green reported its Q4 results, with the EPS ahead of the estimate and the consensus, although the topline met expectations. However, this was more than offset by a 20 percent decline in SG&A expenses.

Related Link: Keurig Green Mountain Beats Q4 Expectations, Shares Jump

“Portion pack organic sales were down 8 percent in the quarter, as a heightened competitive environment in away from home and negative mix from a further shift to licensed sales continued to pressure growth,” the Morgan Stanley report said.

Brewer organic sales fell 31 percent, reflecting persisting inventory headwinds due to weak holiday shipments in 2014, along with mix headwinds due to increased shipments of lower priced products, such as L200 and Mini brewers.

Gross margin was in-line with expectations, “as coffee inflation and obsolescence continued to drive heightened costs.”

However, Grainger pointed out that the initial 2016 guidance of moderate underlying EPS growth would offer adequate cushion to avoid another rebase through the year, given the tailwind from productivity savings worth $100 million, “favorable green coffee costs, reduced obsolescence, prudent investment behind Keurig Kold, and easy topline comparisons.”

Grainger also expressed confidence that Keurig Green’s 2016 performance would be better than that seen in 2015.