Morgan Stanley Highlights Keurig Green Mountain's Third Straight Quarter Of Negative Revisions, Downgrades To Equal-Weight

In a report published Thursday, Morgan Stanley analyst Matthew Grainger downgraded shares of Keurig Green Mountain Inc (NASDAQ: GMCR) to Equal-weight from Overweight with a price target slashed to $60 from a previous $110 following an in-line third-quarter print and what the analyst described as "concerning" initial fiscal 2016 guidance.

Grainger noted his prior Overweight thesis was justified due to Keurig's opportunity for growth in K-Cups given its "strong" market share with the potential for further upside from KOLD. The analyst's downward revised rating now reflects his concerns over Keurig's Hot system growth outlook over the mid-term, putting into question the company's ability to return to double-digit earnings per share growth.

Grainger also pointed out the risk of erosion going forward in the margin healthy K-Cup segment that carries a 45 to 50 percent gross margin rate and EBIT margins of around 18.5 percent on a total company basis. As private labels continue aggressively entering the market, the analyst stated it is "increasingly difficult" to have such a high conviction in K-Cup economics going forward.

"We believe the combination of headwinds impacting Q3 results and the 2016 outlook (i.e, lower installed base growth, away from home share losses, competitive pressure within at-home K-Cup sales), coupled with management's track record of negative guidance revisions, are likely to limit the market's confidence in Keurig's growth outlook for at least the next several quarters," Grainger wrote.

As such, Grainger stated that Keurig's valuation should "contract meaningfully" to reflect a "lower level of visibility into sustainable earnings growth).

The analyst is forecasting a high single-digit growth rate beyond 2016 and a $60 price target and reflects an approximate 12 percent reduction in his 2016 earnings per share outlook ($3.50 from a previous $4.00).