Bloomberg News

Shorts Lose Taste for Keurig as Coke Fuels Stock Rally

March 31, 2014

Options traders are pouring into bullish bets on Keurig Green Mountain Inc., confident Coca-Cola Co.’s investment will keep boosting a stock that has been a favorite target of short sellers.

Bearish speculators have been stepping away from the maker of K-Cup single-serve coffee pods and machines, with the number of shares sold short (GMCR:US) falling 73 percent since December, according to Markit, a London-based provider of financial data. The cost of options speculating on a rise in the shares is the highest in more than six years relative to those predicting a decline, data compiled by Bloomberg show.

Short sellers including hedge-fund manager David Einhorn have been attracted to Keurig amid increased competition and valuation concern as the stock surged more than 500 percent from a 2012 low. Coca-Cola said Feb. 5 it would buy a 10 percent stake and work with Keurig to introduce a system for producing single-serve cold drinks. The deal and new partnerships will fuel further growth in Keurig, according to Scott Van Winkle, a Canaccord Genuity Inc. analyst.

“The Coca-Cola deal makes Keurig a much bigger, longer-term growth opportunity,” Van Winkle, who has a buy rating on the stock, said in a phone interview on March 27. “If Keurig continues to win its former competition through private label deals and branded deals, clearly their market share of K-cups is going to go up as well.”

Short Sales

Einhorn, who said in October that he’s still short Keurig, has been among the most outspoken critics of the company. The money manager who runs the $10 billion hedge-fund firm Greenlight Capital Inc. first criticized the company at an Oct. 17, 2011, conference saying it should improve its disclosure and that it has a “litany of accounting questions.”

Einhorn hasn’t disclosed the size of his wager against Keurig. Jonathan Gasthalter, a spokesman for Greenlight Capital, declined to comment.

Suzanne DuLong, a spokeswoman for Keurig, declined to comment on the Waterbury, Vermont-based company’s options trading.

Short sellers, who increased bets against the company in 2012, have vacated those wagers as the shares continued to rise. Stock that was borrowed and sold to bet on declines have fallen to 5.1 percent of the total outstanding, down from 17 percent at the end of 2012, according to data compiled by Markit.

Keurig Cold

Keurig soared 26 percent on Feb. 6 after announcing the $1.25 billion deal with Coca-Cola. The companies are working together on the Keurig Cold single-cup beverage brewer that will be sold in Green Mountain’s fiscal 2015, which starts later this year.

Keurig will make and sell Coca-Cola-branded pods to go with the machine. It will also partner with other cold-beverage companies to sell single-serve pods that work in the Keurig Cold, Chief Executive Officer Brian Kelley said during a conference call in February. He declined to discuss what other brands may be added and didn’t rule out PepsiCo Inc.

Analysts estimate Keurig’s adjusted earnings (GMCR:US) will expand 10 percent this year, followed by 8 percent in 2015 and 16 percent in 2016, according to data compiled by Bloomberg.

The stock’s rally this year has sent valuations soaring. Keurig trades at 29.1 times projected earnings (GMCR:US), near the highest level since 2011 and more than the 19.2 ratio for an S&P index of 31 packaged food companies in the S&P 500, Bloomberg data show.

‘Vaporware’

Keurig’s stock is “hugely overvalued,” according to Whitney Tilson, the managing partner at Kase Capital Management who is short the stock. The company’s K-cup business is losing market share and facing pricing pressures from similar brands, while Keurig’s cold-drink platform is “vaporware,” Tilson wrote in a March 26 e-mail.

Keurig has been introducing new machines and increasing advertising to get consumers to continue buying K-Cup packs amid more competition as grocery stores including Whole Foods Market Inc. begin selling private-label coffee pods.

“With the Coca-Cola partnership and Keurig Cold, it’ll be at least 12 months until you see the product,” William Chappell, an analyst at SunTrust Banks Inc. in Atlanta who has a neutral rating on the shares, said by phone. “I don’t see a lot that moves the stock meaningfully higher in the next six months.”

Bullish Contracts

The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options known as the VIX (VIX), lost 3.9 percent to 14.41 last week. Europe’s VStoxx Index rose 1.9 percent to 17.35 at 9:44 a.m. in London today after falling 0.9 percent last week.

Calls (GMCR:US) betting on a 10 percent rise in Keurig’s stock cost 1.42 points less than puts predicting a 10 percent decline, according to three-month data compiled by Bloomberg. The price relationship known as skew fell to 0.55 on March 24, the smallest gap since December 2007.

Implied volatility, used to gauge the cost of options, for Keurig is 52.8, based on three-month contracts closest to the stock price. That’s the second-highest level among companies in the S&P 500, data compiled by Bloomberg show.

“One of the things about Keurig is it’s more of a technology company than it is a consumer company,” Marc Riddick, an analyst at Williams Capital Group LP in New York who rates the shares outperform, said by phone. “They created the technology by which the K-cup is designed and they will create technology with a future cold-drink platform. It’s something created in the lab that will now be beneficial to the shares.”

To contact the reporter on this story: Callie Bost in New York at cbost2@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net Jeff Sutherland, Jeremy Herron


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Companies Mentioned

  • GMCR
    (Keurig Green Mountain Inc)
    • $120.94 USD
    • -0.10
    • -0.08%
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