Can a Cup of Java Wake Coca Cola Up?

Almost two weeks ago, I was watching options activity of Green Mountain Coffee Roasters before the bell closed to try and get a gauge of where the so-called “smart money” was placing its bets before the earnings call scheduled to take place. I did not end up placing a bet of my own (a lesson I have learned by being on the wrong side of those calls one too many times in recent history, but I digress..) but a few things stuck out to me: there was outrageous options activity on both the bullish and bearish sides of the stock and there were a few very large blocks of options traded on the bullish side quite close to the end of the day. Even so, the market closed and I had my bets on GMCR missing the quarter partially due to my own knowledge of the company as well as the overall options signals. But then before the call began, something interesting happened. The stock was halted in post market trading and it was announced that Coca Cola had entered into an agreement to take a 10% stake in the company and the stock literally blew up. I had missed my chance for the initial pop, but I wondered, would Coke be a good investment at this point? Well the WSJ came along to answer some of my questions.

Coke is one of the longest standing and most valuable companies out there; worth somewhere around 80 billion. the company had been the model of growth stocks for many years– the WSJ also talks about how a single share from the early 1900’s is worth over $10m today. Recently though, it seems the company (like Buffalo Wild Wings) has been going through a bit of an identity crisis, or maybe that depends on who you talk to. You see, as much growth as Coke has gone through in the past 100 years it comes to a point where it is no longer possible — and as one of the largest if not THE largest globally recognized brands, they seem to be running out of places to go. This seems to be the ideal time where a growth stock becomes a sort of income or value stock that can be held or traded. The WSJ article shows that Coke had over an $8b cash flow last year and they have consistently repaid all of their earnings back out to investors– this is something to look for in an income stock. With the acquisition, and possibly the eventual outright purchase of GMCR I think that Coke presents an interesting opportunity; a company that consistently treats its shareholders well and returns everything possible, with a new potential growth opportunity in home consumables.

While it is definitely too early to tell what will come of this acquisition, I believe that Coke could have just bought themselves some growth. The sector of home beverage production, I think, is more than just a passing fad that should have investors salivating. I have to believe that the grand plan could be for coke to have a machine that could produce whatever drinks you want from coffee to cola in the push of a button from the comfort of your own home. This could be the turning of the tides for a sometimes glossed over stock.

4 thoughts on “Can a Cup of Java Wake Coca Cola Up?

  1. umbrown@umich.edu'umbrown

    Great analysis on the growth potential for Coke. There seems to be a point for a lot of companies where growth using the same products and businesses simply can’t sustain investor expectations. Taking risks on new markets is a great move for Coke at this point and I’m looking forward to seeing where this move takes them.

  2. awerther

    I definitely agree that this is a good move for Coke. And the type of home soda machine you mention is on its way as Coke teams up with Keurig for a “cold machine”. If they can combine the hot and cold, which I imagine they will be able to not too far down the road, this could be a dominating move looking back.

  3. cjamesj

    Interest post, on a related note coke is the major beverage sponsor of the Sochi Olympics and waved its right to serve coffee because they did not have a major coffee presence in Russia. I think expanding their brand to coffee may slightly boost sales, but the majority of coffee is purchased from coffee shops and short of Coke acquiring a major coffee change I don’t see this turning the tides.

  4. josimon

    I could not agree more with your analysis for beverage companies in general. We have already seen similar aquisitions take place with Starbucks who bought Teavana at the end of 2012. In our current time, we are seeing the biggest companies doing their best to become even bigger. I think Coca-Cola will try to enter the coffee industries market share in the next couple of years. While at the same time, Starbucks will be opening Teavana Tea shops in Seattle and New York. There is a lot that can happen in the beverage industry in the next couple years.

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