The accounting practices at Green Mountain Coffee Roasters (GMCR) are not baffling...they are downright ludicrous.
We read balance sheets for a living and after fifteen years, you learn a thing or two about what some managers will do to make their numbers.
Back in the days of Sunbeam (circa Al Dunlop), channel stuffing was the balance sheet elixir du jour and more acute than is practiced now. Sunbeam was notorious for leaving semi-truck trailers parked behind now defunct Montgomery Wards stuffed with blenders and toasters.
The problem however, was that shelves in the store were stuffed too. Dunlop and his gang shoved the inventory down "Monkey's" throat, booked it as revenue and smiled about their turnaround efforts - while getting rich from their stock options.
The post-Enron era ushered in more creative accounting techniques, most of it perfectly legal under GAAP rules. As this evolved, managers got better at stylistic comparisons of pro forma and non-GAAP presentations. GMCR it would appear, is following party line and aggressively.
SA regular Sam Antar, a long-time observer of GMCR, recently reminded the crowd on another GMCR author's article that that the SEC investigation on GMCR is in fact still ongoing, contrary to rumors that it had ended.
GMCR's financial statements continue to indicate deteriorating earnings quality and high cash burn rates. A recent secondary bolstered their capital base, but negative operating cash flow fundamentals will likely chip away this cushion in the coming quarters.
The present danger in our view is that at $43 and change, investors are ignoring an ominous disconnect between management's guidance, overly optimistic consensus estimates and the declining operating cash-flow levels seeping into the earnings base.
Below, we've listed several key issues, but you can review our full report for a more robust perspective here.
- Analysis Evaluation: SHORT / AVOID
- Dual Cash-Flow Trends: DETERIORATING
- Accruals Ratio Trends: EXTREME BEARISH
- Operating Cash-flow as a % of sales: DETERIORATING
- Balance Sheet Cash-flow as a % of sales: BEARISH
- Goodwill Impairment Risk: ELEVATED
The only discernible bright spot we can see is modest improvement in revenue metrics and capital productivity. However, elevated accruals and burgeoning balance-sheet engineering render this a moot point.
GAAP: The relationships between GAAP and non-GAAP comparisons suggest an alarming disparity between the correlations presented. Much of the contrast is related to the non-cash adjustments to the balance sheet accounts from finance and investment activities rather than cash flows provided by/used in operating activities.
What Investors Are Missing: At first glance, Q1 2011's balance sheet would suggest improvements in the company's cash-conversion cycles and reasonable changes in operating assets compared to the growth in revenues. P/P/E spiked 50%, in line with a 55% rise in revenues
Operating cash-flow generated from operations (based on dual cash flow analysis) declined from an average 164% of sales to 70% in the most recent period. Non-cash contributions to earnings derived from balance sheet activity rose from an average 147% of sales to 275% of sales in the latest period. Recent and confirmed signals are BEARISH.
A broader interpretation of GMCR's deteriorating operating cash flows can be seen in the "Dual-Cash Flow Ratios" chart below. Note: Q1 dual-cash ratio is negative.
click to enlarge images
Further evidence of the dual cash regression can be seen in the ongoing divergence between rising balance sheet cash flows and declining operating cash flows (since Q3 2010).
Verification of the deteriorating cash-flow fundamentals is clearly obvious in the accruals. The trend is extremely BEARISH and one of the most intense representations in our research universe thus far.
Earnings Quality: B- and WEAKENING
Est. Fair-Value: $27.20
We believe the recent rally in GMCR shares are related in some part to short-covering following the Q1 earnings report. More than one-quarter of GMCR’s float is held by short-sellers. Given the extreme level of current short interest, the bearish sentiment suggests any further significant upside from current levels will be limited.