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Kass: Felliniesque Action in Green Mountain

Why the Share Price Advance in After Hours Might Be Derailed

I have a number of reasons for my skeptical take and my short position:

  1. The Coca-Cola agreement masked weak fourth-quarter earnings and forward guidance. (On TheStreet, Herbela Greenberg covered this well.)
  2. It could be argued that in light of the fourth-quarter results and absent the Coca-Cola deal, Green Mountain's share price would be under $70 a share on yesterday's release -- perhaps even lower.
  3. The coffee story has likely played out for Green Mountain. If the current fundamental trends continue, Green Mountain Coffee Roasters' sales could shortly turn negative.
  4. A 10% holding in Green Mountain, though too much to ignore, might be too little to matter. (Note: The Green Mountain deal was only $1.25 billion compared to Coca-Cola's $165 billion market capitalization.)
  5. The value proposition of at-home soda (costing about $0.50 a serving) vs. the purchase of a 12-pack for $2.75 at the supermarket is suspect. (At least coffee is brewed, soda is simply poured out of a bottle. In fact, you don't even need a glass!)
  6. The business opportunity is small and might be viewed as an affront to Coca-Cola bottlers who are trying to accelerate bottle and can sales.
  7. The business opportunity involves a lot of execution risk. In particular, the technology for the cold beverages that Coca-Cola and Green Mountain are contemplating (i.e., a carbonation tablet) hasn't even been developed -- there is not even a prototype yet.
  8. It is uncertain that the home soda market is all that large and whether it is taking market share. The heaviest users of SodaStream (SODA) use it for sparkling water, as the flavor market and usage has been slow to develop.
  9. The soda market is in a clear secular decline.
  10. Coca-Cola might have taken the stake in Green Mountain in order to enter the coffee market -- it might want the coffee not the cold!
  11. Coca-Cola paid 168% of SodaStream's market cap for 10% of Green Mountain. Does this make sense in light of SodaStream's large (7 million) installed base while Green Mountain currently has no installed base and still appears to be one and a half years away from its product launch?

Similar to Italian director and scriptwriter Frederico Fellini's films, Thursday evening's outsized share price advance was a combination of investors' and traders' desires, fantasies and dreams.


This column originally appeared on Real Money Pro at 9:31 a.m. EST on Feb. 6.

At the time of publication, Kass and/or his funds were short GMCR, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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