Greenberg: Coke's Green Mountain Stake Not a Day Too Soon
By: Herb Greenberg | 02/06/14 - 07:28 AM EST
SAN DIEGO (TheStreet
) -- News that Coca-Cola (KO)
is taking a $1.25 billion, 10% stake in Green Mountain Coffee Roasters (GMCR)
came in the nick of time.
While details remains sketchy, almost as if the deal was signed so it could be announced as a cover for earnings, this much is clear: Had this deal not been announced, rather than fly after the close, Green Mountain's stock would've likely been pummeled.
Its core business is in sharp decline. Sales growth for the quarter was a mere 4%, down from 10% the quarter before and nearly 16% a year earlier. Every key metric is just as bad: K-cup sales growth skidded to 8% from 21% a year earlier; brewer sales growth was a negative 1% versus a positive 14%. And that's afte
r last year's stock-boosting announcement that it had extended a relationship with Starbucks (SBUX)
But, wait, there's more: Accounts receivable were up 21%, or more than 5-times sales -- almost always a red flag. Free cash flow tumbled 42%. Had it not been for lower coffee costs, which have since evaporated, margins would've looked weak, too.
Guidance, meanwhile, is lower than expected. The company talked about single-digit sales growth through 2015.
But not to worry, CFO Fran Rathke said the company believes the Coke deal, which spans 10 years, "will position us to return to our long-term double-digit earnings growth rate in fiscal 2016, and strongly position us for sustainable profitability over the next decade."
Nothing like the old Hail Mary, wing-and-a-prayer forecast.
: With Coke's investment all of the fundamental concerns have, for the time being, become irrelevant.
All that matters is the hope and hype (which is sure to follow) that Coke will buy the rest of the company. (Highly doubtful, given Coke's stated desire, in its scramble to reignited growth, to strike "creative partnerships," as Coke CEO Muhtar Kent said in the press release announcing the Green Mountain deal.)
All that matters is that Green Mountain's newest Keurig 2.0, which may very well cause confusion in the marketplace, will be a runaway success.
All that matters is that at some point in 2015 Green Mountain's partnered product with Coke will be a home run.
Look, I get it: You can't diminish the importance of the Coke deal to Green Mountain. Coke presumably has scrubbed the company's financial statements, and has found nothing nefarious, or certainly not nefarious enough to drive them away.
As was the case with the Starbucks deal, terms weren't disclosed -- but you can only imagine who drove the better bargain -- and who got the better deal. (Hint: Coke snared its stock at a discount to the market price the day the deal was announced. Translation: This deal was done on Coke's terms.) It's a big deal for Green Mountain, but it really amounts to a puny 1% of Coke's market value.
Still, deals like these always trump what's going on beneath the surface in heavily shorted companies. And with Green Mountain, a Coke-like deal has always been a wild card.
Coke may or may not save the day. Big companies take stakes in smaller companies all of the time. Sometimes, in the end, they matter; sometimes they don't.
I've clearly been on the wrong side of Green Mountain the stock, but on the right side of Green Mountain the business. It's the ultimate Wall Street non-sequitur.
It's hard to say where this will all shake out. With the stock up 45% on the news, trading at 35 times earnings on sharply slower growth, Green Mountain isn't just priced for perfection, but for eternal greatness.
The bigger questions are what does the company do for an encore next quarter? Will investors care if the business continues to slide? Will, as they have done with the likes of Amazon (AMZN)
, cut Green Mountain slack for a year or two? Will Coke's $74.98 purchase price serve as a floor?
I have no idea; neither does anybody else. The beat goes on...
-- Written by Herb Greenberg in San Diego