Keurig Green Mountain: Expect Boost from Lower Coffee Prices

Williams Capital Group’s Marc Riddick explains why he raised his price target on Keurig Green Mountain (GMCR) to $131 from $125:

Reuters

We are increasing our 12-month price target to $131.00, up from our prior price target of $125.00. Our price target represents a target multiple of 32x a blend of our F2014 and F2015 adjusted diluted earnings per share estimates. We believe that Keurig Green Mountain shares will be predominately driven by new products (Keurig 2.0 new hot beverage platform and Keurig Cold new at-home carbonated beverage platform) and other new relationships…

Our F2014 estimates assume a reduction in year-over-year revenue growth of 7.0% to $4.683 billion, (down from our prior estimate of 7.5%), a reduction in our operating margin estimate to expansion of approximately 216 basis points to 19.73% vs. 17.56% in F2013 (down from our prior expansion estimate of 257 basis points) and a reduction in EPS growth to 13.7% (down from our prior estimate of 13.8%). The adjustments to our full year estimates reflect F3Q 2014 results and a 280 basis point reduction of our operating margin estimate for F4Q due to increased expenses to support the new Keurig 2.0 rollout…

We continue to expect benefits from lower coffee prices, which are 100% locked in for F2014 and approximately 75% locked in for F2015. However, we also expect greater brewer sales (which reduces our gross margin estimates), increased spending on R&D, brand building efforts behind new products and continued competitive pressures from all coffee providers, be they whole bean, ground, single-serve, branded, private label, K-cup "compatible" or otherwise.

Shares of Keurig Green Mountain have gained 0.8% to $118.53 at 11:43 a.m. today.