Keurig Gets Buy From Canaccord Despite Recalls

By Mani
Updated on

Keurig Green Mountain will not be significantly impacted by a recent recall of around 7.2 million hot beverage-brewing machines as analysts at Canaccord anticipate accelerated revenue and earnings growth from the coffee maker.

Analysts led by Scott Van Winkle from Canaccord have pegged Keurig’s target price at $168.

Keurig recalls brewing machines

As reported by ValueWalk, Keurig Green Mountain recalled its Keurig MINI Plus Brewing System as it can overheat, spray hot liquid and burn consumers. The coffee maker is recalling 6.6 million units in the United States and 564,000 in Canada.

The company received approximately 200 reports of hot liquid escaping out of the brewing machine. The reports included 90 burn-related injuries. The company reported 17 incidents of minor burns in Canada.

The coffee maker reported that its net sales from brewers and accessories during the fourth quarter ended September 27 declined 5%.

According to the Canaccord analysts, Keurig notified the United States Consumer Product Safety Commission in November, and had already disclosed the issue to investors during its Q414 conference call last month. Hence, the analysts believe the latest announcement should not be new news to investors.

Scott Van Winkle and team point out that Keurig noted a $22 million impact in Q4, which included a $10 million recall accrual that was disclosed in its 10-K. The analysts suspect that the remaining $12 million charge pertains to inventory at retail yet to be sold.

Canaccord maintains “Buy” over Keurig

The Canaccord analysts highlight that at a fraction of a percent, the incident rate is modest. The analysts don’t envisage a major risk, other than bad timing of the announcement just two days before Christmas, as the coffee maker is now pushing the new 2.0 system. The analysts also believe the latest issue doesn’t impact the 2.0 system or the reservoir brewers Keurig has shipped to date. Considering the Q4:14 accrual, the analysts don’t anticipate any change to estimates or price target.

The following table captures the Canaccord analysts’ estimates on Keurig:

Keurig's projections

While maintaining their “Buy” rating on Keurig, the Canaccord analysts note their price target of $168 reflects 32x their C2016 EPS estimate plus expected net cash 12 months from now.

Echoing a similar view, Mark S. Astrachan of Stifel believes the earnings impact specifically from the recall is unlikely to be material, though it could hurt brand perception, negatively impacting further brewer sales.

The Stifel analyst notes the size of Keurig’s recall is notable, especially as Green Mountain claimed an active brewer installed base of 20 mm at year end F2014, with 11 million units sold in F2014.

Stifel currenty has a “Hold” rating on Keurig.

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