Keurig Green Mountain Investors: 'Handle With Care' Into Earnings

In a report published Monday, Morgan Stanley analyst Matthew Grainger maintained an Overweight rating on Keurig Green Mountain Inc GMCR, while reducing the price target from $130 to $110.

Analyst Matthew Grainger mentioned that the near-term concerns were likely to persist in Q3. The company’s shares have been under pressure, with growing concerns related to the K-Cup share losses, potential margin erosion, and continued weakness in brewer sales.

Grainger expects “severe negative mix” and pressure on margins on account of brewer inventory issues to “mark the trough” in 3Q. “Despite these concerns, several intra-quarter data points have been relatively constructive, particularly in recent weeks,” Grainger wrote.

The Morgan Stanley report cited the following data points:

• K-cup category sales remaining steady during F3Q
• “Brewer sales in tracked channels (admittedly only a partial sample) turned positive YoY during the most recent period”
• Morgan Stanley’s proprietary Alphawise survey suggesting “a continued high level of interest on KOLD (23% “very interested”), which remains surprisingly strong (12% “very interested”) even when described at a $299 price point.”

The EPS estimate for 2016 has been reduced from $4.12 to $4.00 to reflect about 9 percent growth, following a 6 percent dip in 2015, and “envisions both conservatism from incoming CFO Pete Leemputte and some incremental spending to mitigate share losses on GMCR-owned K-Cups,” Grainger mentioned, while adding, “Our revised $110 PT (in line with the stock's share price pre-Q2) reflects ~26x C2016e P/E.”