May 6, 2014

Will Keurig (GMCR) Beat This Earnings Season?

By Zacks Equity Research

Keurig Green Mountain Inc. (GMCR - Analyst Report) is set to report second-quarter fiscal 2014 results on May 7. Last quarter, the company posted positive surprise of 7.8%. Let's see how things are shaping up for this announcement.

Factors to Consider This Quarter

Keurig Green Mountain has been posting better-than-expected results for several quarters backed by solid top-line improvement and enhanced operational efficiencies. However, we believe that the Waterbury, VT-based coffee maker may see softer margins in the quarter ended Mar 2014 due to significant increase in coffee prices over the past few months.

Leaf rust combined with severe drought conditions in several parts of Brazil and Africa resulted in record dip of coffee production in 2013. The supply shortage is expected to raise coffee prices thus pressuring the company’s margins. 

Moreover, we believe that the intensifying competitive scenario could bar the company from continuing its earnings streak in the fourth quarter.

As per market research firm, Neilsen and OTR Global, Keurig Green Mountain’s K-cup, a major contributor to revenue growth, is losing share to portion packs of Treehouse Foods Inc. (THS - Snapshot Report). Green Mountain is expected to further lose market share as its signature K-cups and Keurig brewers are facing intense competition from private labels. Many retailers are slashing prices of the Vue brewers following lower sales for several months

However, Keurig Green Mountain is striving to upgrade its Keurig brewer and make it more user-friendly and compatible for both K-cups and Vue packs. These endeavors may offset the difficult competitive environment in the single-serve market and help the company stay afloat in future quarters.

Keurig Green Mountain expects adjusted earnings per share in the range of 93–98 cents in the second quarter, up 5–11% year over year. It expects sales growth in the range of low-to-mid single digits.

Earnings Whispers?

Our proven model does not conclusively show that Keurig Green Mountain is likely to beat earnings this quarter. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 to surpass earnings estimate. However, that is not the case here due to the following factors:

Negative Zacks ESP: ESP for Green Mountain is -4.21%. This is because the Most Accurate estimate stands at 91 cents a share, while the Zacks Consensus Estimate is pegged at 95 cents.

Zacks Rank: Green Mountain carries a Zacks Rank #3 (Hold) which when combined with a negative ESP lowers the predictive power of ESP.

We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Media Contact: 
Conan Li 914.460.4091