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Husky Traders Stock Pitch: GMCR

Husky Traders Stock Pitch: GMCR. Nabil Manji February 26, 2014. Industry Overview. COFFEE! NA/Europe: Coffee = 1/3 of water consumption 2.25b cups consumed per day worldwide. Size: ~$120b global market ~$15b sold by coffee brewers/retailers Second most traded commodity behind oil.

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Husky Traders Stock Pitch: GMCR

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  1. Husky Traders Stock Pitch: GMCR Nabil Manji February 26, 2014

  2. Industry Overview • COFFEE! • NA/Europe: Coffee = 1/3 of water consumption • 2.25b cups consumed per day worldwide • Size: • ~$120b global market • ~$15b sold by coffee brewers/retailers • Second most traded commodity behind oil • Sectors: • Brewers/retailers: SBUX, local coffee shop • At Home: Nestle, Folgers (>60% mkt share) • New “Convenient At Home”: Keurig, Verisimo, Nespresso, etc.

  3. GMCR Company Overview • Founded 1981 as producer, distributor, and retailer of organic, fair trade, and specialty coffees • Buys from farmers  refines & roasts  sells to brewers, retail chains, and directly to consumers In 2006, acquired Keurig • Revolutionized home brewing… • No messy filters • Variety of choices  pleases all • Convenient & fast • No waste • Easy to clean up (no dishes)

  4. Growth Catalysts • Starbucks raising prices  $3-5 per drink unsustainable • Keurig Pods ~$0.25 per drink • Growing health conscience  reversion to drip/black coffee away from fat, sugary milk-based espresso drinks • Desired convenience without hindrances • Easy expansion  no regulatory hurdles Sincerest form of flattery is when your competitors copy you… Starbucks Verismo Nespresso Cuisinart

  5. Basic Financials

  6. Technicals v. “Competitors”

  7. Outlook • Strategic: • Home brewing growing ~5% annually since 2004 • Cost- and health-conscious consumers move away from Starbucks-esque drinks • Keurig has long-term contracts with many producers (Lavazza, Dunkin, Tully’s, GMC, etc.) • New partnerships with manufacturers (Cuisinart, etc.)  increase margins over long-term by focusing on K-pods • Entry into commercial market  prime for disruption • Marketing  customer entrenchment • Operational: • Moving towards asset light structure (outsourcing production to other manufacturers) • Rapidly increasing size  more power over suppliers

  8. Risks • Patents expired last year  easy for competitors to copy • Dependence on suppliers to maintain variety • Quality concerns over Keurig machines haven’t been satisfactorily addressed/corrected • Big price jump after beating 2013 earnings forecasts; maybe we’re too late & future is already priced in?

  9. Takeaways • Price/Stock: • Based on sales/margin growth expectations, a bargain compared to competitors & industry/sector • Newly implemented dividend of $1.00/share • Analyst mean/median target: $125.00 (current price = $116) • My Thesis (risky): • Keurig entering more retailers, homes, businesses • Once people own machine  high margin K-cups • Earnings play (announcing May 5) • Most Keurigs sold holiday season  many K-cups will be sold this quarter for new owners

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