Green Mountain Coffee’s Success Depends On The Keurig 2.0

Keurig Green Mountain (NASDAQ:GMCR)
is set report earnings for its third fiscal quarter after the market
closes on Wednesday, August 5th. Contributing analysts on crowdsourced
earnings estimates platform Estimize.com see profits increasing to 94
cents per share this quarter, up from 82 cents in the same period of
last year. However, the rate of year over year growth is expected to
slide to just 6%, in large part due to a battle over coffee pod
supremacy.

Keurig’s
patent on its K-Cup coffee pods expired back in 2012, allowed
unlicensed competitors to enter the single serving coffee market. This
fall Keurig is preparing to release the Terminator of single cup coffee
systems to wipe out its competition, the Keurig 2.0.

The
introduction of cheaper, competitive pods on the Keurig system has
caused earnings to slide in 3 consecutive quarters. A drought in Brazil,
the world’s largest supplier of coffee, and a coffee eating fungus in
Central America have not helped Keurig maintain margins either. As a
result of diminished supply coffee prices are up, which has pressured
Keurig Green Mountain’s margins. It’s not all doom and gloom at Keurig
though, profits have been consistently increasing, even if at a decaying
pace.

The Keurig 2.0 machine could be just the ticket to rejuvenate profit growth, if two critical conditions are met.

1. Consumers
   need to purchase the new device: The 2.0 model will allow java heads to
   finally brew a full pot of coffee. This is a long awaited upgrade for
   coffee drinkers who previously had to wait to get their fixing one cup
   at a time on first generation models. However the new device will come
   with a $189 pricetag, and coffee drinkers with the older models may not
   all choose to upgrade to the new device. There is some concern that the
   single serving coffee market may already be deeply penetrated.
2. New
   technologies that Keurig is throwing into the 2.0 need to succeed in
   keeping competitors off its platform. Keurig is attempting to dig a deep
   moat around its new model, even integrating a camera to prevent
   unlicensed pods from functioning in the Keurig 2.0. Sam Reed, the CEO of
   Treehouse Foods (NYSE:THS),
   thinks he can crack the code on the Keurig 2.0’s right management
   technology within a year. Keurig will need to protect its exclusivity on
   the 2.0 to realize the full potential of earnings growth that the
   device could drive.

As
previously mentioned the Keurig 2.0 is scheduled to be released this
fall. For now, earnings growth will continue to grind lower, but buy
side and independent analysts on Estimize still expect Keurig to perform
much better than the sell side’s consensus.

On Wednesday
contributing analysts on Estimize are expecting Keurig Green Mountain to
beat the Wall Street earnings consensus by 7c (8%) per share and top
the Street’s revenue consensus by $23 million (2%). Green Mountain has
breezed past the Street’s EPS consensus in each of the past 8 quarters.
Analysts on Estimize expect the coffee pod company to do it again this
time.

As the rate of earnings growth continues to gradually
approach 0, pressure is mounting for the Keurig 2.0 to become the coffee
pod monopoly establisher that Green Mountain needs it to be. With the
rate of year over year profit expansion expected to trickle to just 6%
this quarter, it looks the Keurig 2.0 will be launched just in the nick
of time to get investors excited again. All Keurig needs to do is sell
the 2.0 and ensure that its new rights management technology can keep
imitators out.