In the summer of 2012, this stock looked like yesterday's news.
In less than a year, shares had crumbled from a high above $100 to $17, as traders jumped ship in advance of the company's key patent expiring. They feared the market would be flooded with single-serve coffee brands.
Yet, two years later, Keurig Green Mountain (Nasdaq: GMCR) and its K-Cups continue to reign supreme. And shares of the undisputed king of the single-serve coffee market are back in the triple digits and trading near their all-time highs.
The competition still lags far behind, having penetrated only 13% of U.S. households. Keurig controls the other 87%, with an estimated 16 million of its coffee machines in U.S. homes.
The company continues to grow by strategically partnering with major brands like Starbucks (Nasdaq: SBUX) and Dunkin' Brands (Nasdaq: DNKN) to license its K-Cup technology. In its most recent quarter, sales of K-Cups increased 13% year over year, helping boost revenue 10% to $1.1 billion.
Keurig recently inked a potentially mammoth deal -- a 10-year partnership with Coca-Cola (NYSE: KO). Together the companies will produce Coca-Cola products in single-serve pods for the new Keurig Cold system, which is expected to be ready for distribution by 2015.
Coca-Cola spent $1.2 billion to acquire a 10% stake in the product. A possible motivation was that the cold system will likely take a bite out of competing home soda brewer SodaStream's (Nasdaq: SODA) sales. Keurig, in turn, benefits from Coca-Cola's global market presence.
Additionally, the company signed an agreement to expand its partnership with J.M. Smucker (NYSE: SJM), which markets popular coffee brands like Folgers, Cafe Bustelo and Milestone. These brands, currently sold as pods, will now also work with Keurig's upcoming brewing system. The Keurig 2.0, which is due out this fall, will brew both single cups and full pots of coffee.
Keurig is also expanding its partnership with North American Subway restaurants. The deal will see thousands more Keurig K150 brewers across the sandwich chain. These commercial one-cup brewers make it feasible for Subway to serve fresh coffee, one cup at a time, any time of day.
Technically, the stock looks strong. Since its low a little less than two years ago, the stock is up more than 600%.
Coming off a July 2012 low near $17, shares formed a major uptrend line, rising almost without interruption into the low $80s in less than a year. Shares stalled at this level until late August, when they broke out temporarily and peaked near $89.
GMCR then retreated, dipping to a low just under $57 in November, where it found support marked by the intersection of the major uptrend line. Bouncing off support, the stock gradually rallied, testing the lower end of resistance near $81 in late 2013/early 2014.
In early February, shares skyrocketed on the Coca-Cola news and strong first-quarter results, blasting through resistance and quickly reaching an all-time high of $124.42. Profit-taking set in and shares sank to around $90 in early May, where they again encountered support from the major trendline.
From there, they rallied as bargain hunters swooped in. A small accelerated uptrend line formed, which GMCR is currently trading above. If shares can decisively break $124.42 resistance, the stock will bullishly complete a small ascending triangle formation.
According to the measuring principle for an ascending triangle -- calculated by adding the height of the pattern to the breakout level -- shares could reach a new high of $137.09. At current levels, this target represents 14% potential returns.
The bullish technical outlook is supported by strong fundamentals.
For the upcoming fiscal third quarter, scheduled to be reported in early August, analysts project revenue will increase 8% from the year-earlier period to $1 billion. For the full fiscal 2014 year, ended in September, analysts also expect revenue to rise 8% to $4.7 billion.
Third-quarter earnings are estimated to expand 6% year over year to $0.87 per share. For fiscal 2014, analysts expect earnings to rise 12% to $3.78 per share.
Management is pursuing a share buyback. In mid-May, the company announced it had reacquired 2.8 million shares, with the possibility of repurchasing 6.5 million more by February 2015. This ongoing buyback should help put a floor under the share price.
Risks to Consider: Keurig Green Mountain is currently king of the single-serve coffee market. Long term, environmental concerns over the plastic used to package the pods could hurt the company. For the near term, its strategic partnerships should help propel revenue and earnings growth.
Action to Take -->
-- Buy GMCR at the market price
-- Set stop-loss at $111.07, just below support marked by the intersection of the accelerated uptrend line
-- Set initial price target at $137.09 for 14% gain by mid-fall
This article was originally published at ProfitableTrading.com:
King of Single-Serve Coffee Could Land Buyers Another 14%