Keurig Green Mountain (NASDAQ:GMCR) has been busy joining hands with coffee companies and other retail chains over the last two years, to increase its market share in the single-serve market. Keurig’s net revenues increased by 300% over the last four years, as it reached $4.7 billion in 2014.  The company’s stock skyrocketed from $75 at the start of 2014 to $154 in November, before falling over 25% to $115. According to Trefis estimates, Keurig’s Single-Serve Cup Packs segment accounts for over 70% of the valuation, whereas Brewers and Accessories accounts for roughly 15% of the valuation. In 2015, Keurig’s main focus will be on the launch of ‘Keurig Cold’ in North America. Keurig Cold will be designed to dispense single servings ranging from carbonated drinks to non-carbonated beverages, such as juice drinks and iced teas. There could be a significant upside for Keurig Green Mountain if Keurig Cold turns out to be a bigger than expected segment for the company over the next 5-6 years. Another event that could significantly impact the Keurig’s business is the increase in coffee prices.
We have a $102 price estimate for Keurig Green Mountain, which is 10% below the current market price.
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We have already discussed one scenario that has a potential to affect Keurig’s business model considerably. (See: Scenario: Is This The Stagnation Stage For Keurig Brewers?) Here are two other scenarios that can impact Keurig’s stock.
Keurig Cold, a joint venture of Keurig and Coca-Cola (NYSE:KO), is scheduled to be launched in the fall of 2015. Keurig recently added Dr Pepper Snapple (NYSE:DPS) as another beverage partner, as the two companies will be joining hands in developing a selection of Dr Pepper Snapple’s brands for the upcoming Keurig Cold Platform. Moreover, later in December, the company entered into an agreement to acquire the remaining 85% equity of Bevyz, a fully owned subsidiary of MDS Global Holding Ltd. (See: Keurig Green Mountain- Bevyz Deal: More Than Just An Acquisition) With Bevyz under its product line, Keurig will have a strong technology advantage, too.
Trefis has structured the Keurig Cold segment on the assumptions that Keurig will generate revenues from the sales of Keurig Cold brewers, and also will receive royalties on sales of portion packs. Currently, we have taken a conservative estimate that the annual volume of brewer sales will rise from 0.3 million in 2015 to 0.83 million in 2021. As a result, our estimate for revenue generation from Keurig Cold brewer sales reaches $81.5 million in 2021. On the other hand, we estimate annual volume of portion packs per cold brewer to rise from 30 in 2015 to 114 by the end of 2021. In this driver, our estimate for revenues from Keurig cold portion pack reaches $2.5 million in 2021, with a royalty rate of 8%.
If Keurig Cold turns out to be a blockbuster product and sales of both the separate products increase in the initial few years, the corresponding volumes could rise significantly. Furthermore, if the company expands the segment internationally in the next 3-4 years, the brewer volumes could get an additional boost. Moreover, over the next 5-6 years, the margins could improve by 10 percentage points as well. If the annual volume of Keurig brewers rises to 3 million by the end of our forecast period, revenues from Keurig Cold Brewers will reach $296 million. Similarly, if portion pack volume per cold brewer rises to 250 in 2021, the revenues from this driver would rise to $13 million. This scenario would result into an 8% upside to our price estimate for the company.
For the first six months of 2014, prices of the Arabica coffee beans surged more than 90%, shooting above $2 per pound, due to speculations of a decline in coffee production. However, the prices declined by more than 40% in the next 4 months, due to an improvement in weather conditions in the South American countries. Experts still believe that the prices might shoot up again in 2015, foreseeing a decline in the production output in Brazil. FCStone, a U.S. based group, estimates the Brazil overall coffee output at 44 – 45.5 million bags in 2015. 
The rise in coffee prices will impact the price of portion packs sold by the company. Keurig also deals with the sales of coffee in other package types, such as bagged coffee and cans, in grocery stores and other mass channels, as well as ancillary products, such as coffee for offices. In case of a price rise, the company would be forced to raise the price of its portion packs.
Trefis estimates the average price of portion pack to rise from $0.33 in 2015 to $0.39 in 2021. On the other hand, Trefis includes the revenues from packaged coffee sold by the company in ‘Royalty and Other Products segment,’ and estimates the segment’s revenues to rise from $267 million in 2015 to $351 million in 2021. In the above mentioned scenario, the average price of a portion pack would rise to $0.45 by 2021, whereas the revenues from ‘Royalty and Other Products segment’ would rise to $400 million by the end of 2021. This scenario would provide a 12% upside to our price estimate for the company.
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