Short interest had crept up in GMCR stock across late 2013, and that resulted in a big short squeeze on the heels of the Coca-Cola deal.
Click to Enlarge Those who believed Green Mountain lacked a second act had to eat their words as the K-Cup king signed a 10-year agreement with the world’s largest beverage company to deliver cold beverages into homes the same way it did with coffee.
But the million-dollar questions are whether this plan will succeed and whether the short squeeze in the wake of the Coca-Cola deal will stick. Or will GMCR stock break down after the initial enthusiasm wanes?
For starters, it’s important to note that Coca-Cola has some skin in the game at Green Mountain. Coke agreed to take a 10% stake in GMCR stock under the terms of the deal, acquiring roughly 16.7 million newly issued shares at $74.98 a piece — a total investment of about $1.25 billion. The transaction is expected to close next month.
Coca-Cola also has the option to boost its minority stake up to 16% during the next 36 months.
GMCR now is under the leadership of a former Coca-Cola exec in Brian Kelley. When he took over in 2012, you can bet this was on his radar and thus you can bet the current deal wasn’t a knee-jerk plan brought about by panic.
As for Coca-Cola, the company has a long history of seeking out complimentary revenue opportunities, so this is a logical and pretty necessary fit to continue growth for a brand that has reached saturation in some markets.
In 1988, Coca-Cola introduced Powerade to get in on the sports drink market and compete with PepsiCo (PEP) product Gatorade. In 1999, it launched Dasani bottled water to get in on that corner of the beverage market. In 2008, it made a $2.5 billion bid for China Huiyuan Juice Group to increase its juice business. Now, homemade Coca-Cola products seem like the natural next step in the company’s drive for market expansion.
So on the surface, the deal is a win-win for both Green Mountain and Coca-Cola.
The only real question is one of valuation. There clearly is a lot of expectation that this deal will deliver profits down the road, considering that GMCR stock now boasts a forward P/E of about 28 based on 2014 earnings and forward P/E of about 25 based on 2015 numbers. To justify that multiple, the Coca-Cola deal is going to have to at least deliver a mild bump above previous forecasts.
But after getting burned in GMCR several times in recent years, the shorts are definitely going to think twice before targeting this company.
On the whole, I think the gains will stick. And while buying Green Mountain Coffee Roasters after the pop might be a bit late, it still could be in time enough to ride GMCR stock to profits across the next 12 to 18 months.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.