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Shares of coffee giant Starbucks Corporation (SBUX - Analyst Report) reached a 52-week high of $63.19 on Friday, May 10, following its announcement of the expanded K-Cups distribution deal with specialty coffeemaker Green Mountain Coffee Roasters, Inc. (GMCR - Analyst Report). The deal is expected to further strengthen Starbucks’ presence in the premium coffee market.

Starbucks beat its previous high reached late last month on the back of strong earnings results for the second quarter of fiscal 2013. Starbucks also upped its earnings guidance for fiscal 2013, while retaining its sales, comps and operating margin outlook.

The closing price of the coffee maker on May 10 was $63.10, representing a solid 1-year return of about 16.5% and year-to-date return of about 15.5%. Average volume of shares traded over the last three months stands at approximately 5028K.

Growth Drivers

Starbucks and Green Mountain have announced a new minimum five-year agreement under which Starbucks will triple the number of Starbucks products that can be run on Green Mountain’s Keurig brewers. Under the existing agreement, Starbucks manufactures and sells Starbucks-branded single serve Vue and K-Cup packs to be used on the Keurig platform. Keurig is an exclusive single-cup machine which makes Starbucks coffee and Tazo tea.

Under the new expanded agreement, Starbucks will supply other brands including Seattle’s Best Coffee, Torrefazione Italia coffee, Teavana Teas, and Starbucks Cocoa in addition to the Vue and K-Cup packs. The expanded agreement, which replaces the first deal entered in Mar 2011, further strengthens Starbucks’ position in the premium single-cup coffee market.

The premium coffee segment now accounts for over 50% of the total coffee sold in the U.S. grocery, drug, and mass channels. Starbucks owns 28.2% share of premium coffee in these channels. In the premium segment, premium single cup makes up 20% of the market. Starbucks, through the VIA Ready Brew and Starbucks K-Cups, commands almost 22% share of the premium single cup market, which is a huge improvement from its zero presence in this segment just a couple of years back. The long-term strategic Green Mountain tie, together with the newly launched Verismo at-home-coffee machine and the innovations around VIA and K-Cups are expected to help Starbucks capture further share of this fast growing market in the coffee industry. The premium single-serve category is expected to become an $8 billion market globally.

Starbucks carries a Zacks Rank #2 (Buy). The company has compelling growth drivers, like La Boulange bakery products, Verismo at-home-coffee machine, Evolution Fresh juices, Teavana tea and K-Cups portion packs, to sustain earnings momentum in the upcoming quarters.

Bloomin' Brands, Inc.(BLMN - Snapshot Report) and Cracker Barrel Old Country Store, Inc. (CBRL - Snapshot Report), both carrying a Zacks Rank #1 (Strong Buy), are other stocks worth considering in this space.

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