At the Value Investing Congress in New York City Monday morning, renowned hedge fund manager and short-seller David Einhorn slammed Vermont-based Green Mountain Coffee Roasters (Nasdaq: GMCR). Within minutes of his 100+ slide PowerPoint presentation, shares of the single-serve coffee maker were sinking, and at mid-day the stock was down roughly 10 percent.
During a 45-minute presentation Einhorn highlighted his many concerns, including:
- Green Mountain Coffee continues to be changing and reducing its quarterly financial disclosures, making it increasingly difficult for analysts to understand the performance of the business.
- The inquiry from the Securities and Exchange Commission (SEC) remains outstanding and is a risk to the company and the stock.
- Internal accounting controls are insufficient for a company of this size.
- Bullish investors and analysts following the company overstate the market potential for Green Mountain Coffee since the low-hanging customers have already purchased.
- Sales of K-Cups per Keurig machine (defined as “attachment rate”) appear to be falling, as early penetration of the Keurig appealed primarily to the most dedicated of coffee drinkers.
- Keurig machines are overpriced, and K-Cups are expensive compared with home brewed coffee.
- Patents that give Green Mountain Coffee a virtual monopoly on K-Cups expire in 2012, and are unlikely to be extended.
- Big-name partnerships (i.e. Starbucks, Smuckers) will lead to reduced profit margins.
- Negative cash flow grows, even as revenues are rising.
- Capital spending far exceeds the company’s income and is unsustainable (+130% of net income in 2011 and +200% of net income in 2012).
- Unexplained strong outperformance in the latest quarter leads to questions about revenue recognition.
- Employees report that Green Mountain uses transportation of inventory to book fraudulent revenues to meet or beat revenue and earnings expectations.
- Green Mountain has large amounts of expired K-Cup products in its warehouses and products approaching their expiration date on the shelves.
- Insiders have been aggressively selling GMCR stock; total YTD 2011 insider sales have been $172 million.
Einhorn observed in his presentation that Green Mountain Coffee shares are trading at 36 times 2012 EPS estimates. He points out that an analyst at Suntrust is forecasting longer-term EPS growing to $9 per share. However, Einhorn’s model based on lower K-Cup attachment rates and a smaller total market size suggests that a more realistic long-term EPS expectation is $3.50 per share.
For those who have followed David Einhorn, you’ll remember that he was one of the first short sellers of Lehman Brothers in late 2007 and more recently The St. Joe Co. (NYSE: JOE).
If you believe Einhorn’s extensive research on GMCR, including conversations with current and former employees at the company and its distributors, than you’ll probably agree with me that the 10 percent fall for the stock today is likely just the start.
Disclosure: I personally initiated a short position in Green Mountain Coffee Roasters following Einhorn’s presentation this morning.