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Processed and Packaged Goods

Processed and Packaged Goods. Matt Moore Connor Myers Brian Reynolds Angie Zhao. Industry Analysis. 50/50 between coffee and food Stable, mature company No exciting developments in the near future Not comparable to Starbucks or Green Mountain About 1/10 th of the size of Mondelez.

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Processed and Packaged Goods

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  1. Processed and Packaged Goods Matt Moore Connor Myers Brian Reynolds Angie Zhao

  2. Industry Analysis

  3. 50/50 between coffee and food • Stable, mature company • No exciting developments in the near future • Not comparable to Starbucks or Green Mountain • About 1/10th of the size of Mondelez

  4. Starbucks Sales: 14.9 billion, 3 times GMCR’s Brick & mortar stores, drive-thru A lot more well-established than GMCR International operations

  5. Mondelez

  6. What about Mondelez? • Company does not have reliable time series data • No longer major player in coffee market with divestiture of Maxwell House • Restructured into a snack and biscuit/cracker company • 10 times larger than the next company in industry • Already in mature state • All future growth will be coming from emerging markets

  7. 3 Other Recommendations Current Calculated Equity Buy/Hold/Sell? Share Price Value Per Share Mondelez: $35.94 $34.50 Hold Smucker: $97.46 $99.22 Hold Starbucks: $70.93 $29.44 Sell

  8. Keurig Green Mountain Changed name as of March 2014 Reflects that 92% of sales were from Keurig based products

  9. K-cup Brands Green Mountain Coffee Starbucks Dunkin’ Donuts Caribou Coffee Newman’s Own Twinings Folgers Kirkland

  10. Valuation as of 9/30

  11. Prices of 9/30 Market Price: $75.33/share Valuation: $47.38/share Recommend: Sell

  12. Information • There is new information about company since 9/30 • Need to address information in assessing valuation as of today • SWOT Analysis

  13. Strenghts

  14. Strength • Convenience • Under 1 min to brew cup of coffee • No filters or coffee grounds • No wasted coffee

  15. Sales Breakdown 99.94% of Sales from North America 75% of U.S. market share for single-cup brewers (Motley Fool)

  16. Weaknesses

  17. Weaknesses • K-Cups are expensive • About $.65 per cup • Cheaper to buy reusable filter for Keurig machine and bag of ground coffee • Still get convenience of Keurig machines

  18. David Einhorn Einhorn competing in World Series of Poker • Publically took massive short position • 110 slide presentation called “GAAP-uccino” • Claims “books are cooked” • SEC investigation into sales • No more data on K-Cup sales • K-Cup patent expired

  19. Sales Breakdown

  20. Opportunities

  21. Projected Brewer Sales

  22. Projected K-cup Sales

  23. Worldwide Coffee Consumption US ranks 16th Canada ranks 12th Yet 99.94% of sales are from these countries Large potential to bring Keurig to international markets

  24. Keurig to UK Partnered with Seymour Valentine, largest UK independent vending operators Keurig machines to hit UK in 2014

  25. Keurig to UK

  26. International Expansion Expansion into 12 international markets as of 2013 Potential to expand to other markets as well

  27. Product Innovation Opportunity to increase sales in North American market Besides Keurig K-cup, other areas to innovate

  28. Brian Kelly

  29. Brian Kelley CEO of Keurig Green Mountain Former COO of Coca-Cola Former VP & GM of Sales for GE’s Appliance Division

  30. Coca-Cola Agreement

  31. YTD Graph

  32. David Einhorn • Short position was “only significant loser” in portfolio for 2014 Q1. • Has “lots to say” about deal with Coca-Cola, but would “defer that discussion to another time”

  33. Possible Growth Rates 2019: 20% 2020: 17% 2021: 14% 2022: 11% 2023: 9% 2024: 8% 2025: 7% 2026: 6% 2027: 5% 2028: 4% 2014: 20% 2015: 30% 2016: 30% 2017: 30% 2018: 30%

  34. Valuation 2/20

  35. Valuation 2/20 Market Cap: $123.46/share Valuation: $111.20/share GMCR agreement with Coca-Cola changed the valuation considerable amount Recommendation: Hold

  36. Other Innovation Keurig Rivo Keurig 2.0

  37. Keurig for Everything?

  38. Future of Keurig Machine • Impractical to have a Keurig machine for everything • Is it possible to combine multiple Keurig machines into one? • Could Keurig machine be a new standard kitchen appliance? • Brian Kelley did work for GE’s Appliance Division

  39. Threats

  40. Patents Expired • Patent on K-cups expired in Sep 2012 • Opportunity for cheaper generic K-cups • However, Keurig 2.0 will only accept Keurig K-cups

  41. BlackBerry Syndrome • A new company could revolutionize the market and eliminate Keurig Green Mountain • Similar to Apple/BlackBerry

  42. Coffee Prices

  43. Translating into Numbers Given the current trends, how do you project data for Keurig Green Mountain? No analyst reports projecting future sales with two new products and international emergence

  44. Translating into Numbers Bottom line, we can make a mess of it

  45. Rule of 72 If the company grows at 13%, sales will double in 5.5 years Is 13% too optimistic? If 8% annual growth, company would double in 9 years

  46. Increase Projected Sales • Keurig hasn’t invented new machine in last few years • Releasing two new products within next couple of years • New innovation changed how we thought of company • Expanding to international markets

  47. Possible Growth Rates 2019: 20% 2020: 15% 2021: 12% 2022: 10% 2023: 9% 2024: 8% 2025: 7% 2026: 6% 2027: 5% 2028: 4% 2014: 20% 2015: 40% 2016: 40% 2017: 40% 2018: 30%

  48. Amount Captured

  49. DCF Model

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