Starbucks, Green Mountain: K-Cup Deal

(Starbucks-Green Mountain partnership report updated with Credit Suisse estimates on the deal's earnings impact).

SEATTLE ( TheStreet) -- Starbucks ( SBUX) and Green Mountain Coffee Roasters ( GMCR) shares pulled back somewhat on Tuesday, in line with a broad market selloff, though the pair remains much higher in the week after they announced a much-anticipated partnership in the single-serve coffee market.

Starbucks and Green Mountain said early Thursday that beginning in the fall of this year Starbucks and Tazo tea branded K-Cup portion packs will be available for Green Mountain's popular Keurig single-cup brewing systems.

Shares of Starbucks and Green Mountain surged on the day of the announcement, closing up 9.9% and 41.4%, respectively. On Tuesday, Starbucks shares were 0.5% lower in morning trading at $35.55 while Green Mountain lost 1.2% to $58.33.

Shares of rival coffee maker Peet's Coffee & Tea ( PEET) had plunged 11.4% on Thursday, demonstrating investors' disappointment that the California coffee roaster and retail chain operator was left out of the lucrative new partnership. Peet's shares edged another 1% lower Tuesday morning to trade at $41.62.

Starbucks hinted last month that such a partnership was in the works when it told news outlets in February it had plans to announce a new product for the single-serve coffee market "in the near future." The Seattle coffee shop chain did announce a distribution agreement with Courtesy Products, a privately held provider of in-room coffee service to hotels across the U.S.

Starbucks already sells individual instant coffee packets under its Via brand, but speculation among analysts had been mounting that Starbucks was poised to push more aggressively into the single-cup brewing market now dominated by Green Mountain's Keurig machines and K-Cup portion packs .

Thursday's announcement further confirms Starbucks push to expand its footprint in the single-serve market.

Analysts from Credit Suisse estimate that the deal will add 15 cents per share to Starbucks' earnings in fiscal 2012, and 23 cents per share in fiscal 2013.

Analyst Keith Siegner noted that the Starbucks-Green Mountain deal represents an example of extremely high-return potential with very low risk for the Seattle company to leverage its brand equity.

The partnership also adds weight to Green Mountain's Keurig platform, already the leader in the at-home and in-the-office single-cup brewing market.

Moreover, Starbucks committed very little capital to the deal and retained a fair amount of flexibility to continue to pursue other single-serve opportunities.

With the Starbucks-Kraft partnership now officially expired , Siegner said market watchers will look to Starbucks' second-quarter results for a pickup in comparable same-store sales, better margins and further clarification on its post-Kraft packaged coffee business.

Canaccord Genuity consumer analyst Scott Van Winkle noted that the Starbucks-Green Mountain deal lessens the risks of K-Cup competition.

"The Starbucks deal announced Thursday is much more significant than just an incremental brand associated with Keurig," he said. "The deal is further validation, locks up the final major US coffee brand (excluding Maxwell House, which is attached to the Tassimo system) and thus reduces risk of future K-cup competition."

"The deal's impact on Green Mountain shares is rightfully more than the impact on near-term earnings or cash flow," Van Winkle added. "We believe that the Starbucks partnership reduces risk by at least 20% and thus have increased our near-term price-to-earnings target by 20%."

Maxwell House coffee is owned by Kraft Foods ( KFT). Until recently, Starbucks had been providing coffee discs for Kraft's Tassimo single-cup home brewers . That agreement officially ended March 1 after a drawn out, public legal battle between the pair in which Starbucks claimed that Kraft neglected and mismanaged the partnership.

Despite Tassimo's success with some consumers, Green Mountain's Keurig brewing system enjoys market share of around 80%, according to Reuters, dominating other competitors as well, including Sara Lee's ( SLE) Senseo brewer and Nestle SA's ( NSRGY) Nespresso system.

Following Thursday's Starbucks-Green Mountain announcement, Van Winkle reiterated his buy rating on Green Mountain shares, noting that "we expect several years of rapid growth before household penetration rates of single-cup coffee brewing begin to mature."

Standard & Poor's restaurant analyst Erik Kolb raised his 2012 earnings estimates for Starbucks and increased his price target on the stock following the Green Mountain partnership announcement.

"We favorably view the alliance, and think this will significantly raise SBUX's presence in the growing single-cup segment, as well as further SBUX's efforts to enter new consumer markets," Kolb noted. "We are also encouraged to hear SBUX K-Cups will likely be available at a large variety of retailers in fall '11."

Kolb now expects Starbucks to earn $1.79 per share in 2012, up from his prior estimate of $1.71. He raised his price target on the stock by $3 to $41.

Analysts' consensus was for Starbucks to earn $1.77 per share in 2012, based on the average call of 22 analysts polled by Thomson Reuters.

Starbucks and Green Mountain said the new Starbucks and Tazo K-Cups will be available through food, drug, mass, club, specialty and department store retailers throughout the U.S. and Canada later this year.

By 2012, the companies expect the K-Cups and Keurig brewing machines to be available in Starbucks stores, and plan to offer customers the Starbucks K-Cups through Green Mountain's consumer-direct Web sites and Starbucks consumer-direct Web site.

"Today's announcement is a win for Starbucks, a win for GMCR and most importantly a win for consumers who want to enjoy Starbucks coffee with the Keurig Single-Cup Brewing system," said Starbucks CEO Howard Schultz on the day of the Green Mountain partnership announcement. "Our research shows that more than 80% of current Starbucks customers in the U.S. do not yet own a single-cup brewer and our relationship will enable Starbucks customers to enjoy perfectly brewed Starbucks coffee at home, one quality cup at a time."

The Keurig-installed base grows at over 5 million brewers annually, Canaccord Genuity's Van Winkle said last month, an attractive growth prospect for Starbucks which has said it intends to make its coffee available in every form consumers want.

Van Winkle said then he expects single-cup coffee sales, including brewing machines and coffee pods, to rise to $4 billion in the U.S. this year.

Richard Haffner, head of global beverage research at Euromonitor, told Reuters that U.S. sales of single-serve coffee pods (excluding brewing machines) grew to $600 million in 2010. Global sales were $4.3 billion last year.

Van Winkle added that "attaching to the new Keurig technology could put Starbucks in a position to expand the range of beverages available, to lead a better solution than is in the market today, and to be the driver of adoption utilizing its stores for distribution."

"Keurig is the dominant brand in single-serve coffee with rapidly rising consumer adoption of its brewers seeding a market opportunity that Starbucks can't resist," Van Winkle said.

Van Winkle maintained his buy rating and $50 price target on Green Mountain throughout the building anticipation of a deal with Starbucks, and estimated that "earnings-per-share can exceed $1 for each 5% market penetration, with a 25% household penetration looking achievable."

JPMorgan analyst John Ivankoe noted in December that "such a product will be incremental to Starbucks' store sales and could easily be a $1 billion revenue opportunity for Starbucks in the U.S. alone."

Starbucks spokeswoman Lara Wyss likened the coffee company's plans to penetrate the single-cup coffee brewing market to the impact Apple's ( AAPL) iPhones had on the smartphone market.

-- Written by Miriam Marcus Reimer in New York.

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