How Much Worse Can It Get At Keurig Green Mountain? Wedbush Cuts Price Target

• Shares of Keurig Green Mountain Inc GMCR have lost around 60 percent year-to-date.
• Phil Terpolilli of Wedbush explored Keurig's long-term scenario for its hot platform.
• Terpolilli maintained a Neutral rating with a price target lowered to $60 from a previous $67.

Keurig Green Mountain launched its Kold brewery system this week, but investor focus will remain on the "changing dynamics" for the company's hot platform as it will likely represent nearly all of its profits in fiscal 2016, according to Wedbush's Phil Terpolilli.

In a report published Thursday, Terpolilli evaluated Keurig's competitive positioning within the hot coffee market. The analyst maintained a Neutral rating on the stock with a price target lowered to $60 from a previous $67 as a result of his analysis.

Related Link: Starbucks Keeps Selling K-Cups By The Boatload

According to Terpolilli, K-Cups machines should continue to rise as a percentage of the overall market as consumers continue seeking the convenience of a single-serve coffee. However, less-penetrated consumer demographics could "gravitate" towards K-Cup single serve pods in the $0.30 to $0.50 range which is below the average historical K-Cup price premium.

Terpolilli also pointed out that Keurig's new 2.0 coffee machine offered the company an opportunity to recapture K-Cup market share from unlicensed manufacturers (i.e "Keurig compatible" pods). This advantage may have been short lived as brewing system has been successfully "cracked" by competitors and the company is facing yet again the prospect of share disruption.

Finally, despite the "sizable" retail prime premium for K-Cups (as high as 6x bagged coffee), the company's margins were "essentially in-line" with bagged coffee gross margins of 45 to 50 percent. In addition, the analyst estimated that the company's margin structure will mitigate towards a "value-add private label rate" of around 35 percent.

Bottom line, Keurig will "inevitably" face volume and margin pressure as unlicensed competitors continue entering the 2.0 system. The analyst pointed out that he would need to see evidence that the company will be able to "keep its grasp" on its share of the K-Cup market beyond the next one to two years.