Keurig Green Mountain's Growth Targets Might Be Worth Questioning

Shares of Keurig Green Mountain Inc (NASDAQ: GMCR) are down roughly 35 percent since August 5. In a report issued Thursday, Roth Capital Partners analyst Anton Brenner said that, while at current valuations, the stock seems inexpensive -- especially given its 2.2 percent dividend yield, the company’s long-term growth targets are questionable.

In fact, the firm believes “the unattractive short-term outlook and skepticism as to the ability to achieve longer-term sustained double-digit revenue and 15% EPS growth limit the upside potential for the stock.” Accordingly, it maintained a Neutral rating on the stock and trimmed its price target to $58.

A Clouded Outlook

The report highlighted some concerns regarding both short- and long-term growth. Over the short-term, increased competition in pods, slower brewer installed base growth and a swing in the product mix towards private labels have hit revenues and reduced profit margins and should continue to do so at least through fiscal 2016.

Moreover, the Keurig 2.0 has failed to reduce the share of unlicensed competitive products, leading to a reduction of Keurig's owned and licensed share.

For the longer-term, management expects international sales to account for 10-15 percent of revenue by 2020. Given current penetration rates, international expansion targets seem unrealistic, particularly given the company’s poor track record in product innovation – one of the main factors behind growth.

Finally, the analysts at Roth note that, “While a new productivity program is intended to generate savings of $300MM over three years, this is worth less in valuation than rapid revenue growth.”