Green Mountain Coffee Roaster (GMCR) reported its results yesterday (see transcript) and a sequential decline in September quarter sales versus June quarter sales disappointed a lot of investors. The stock corrected 35% after hours. This is over and above the 40% correction the stock has already seen since September 19th.
The Reason Behind GMCR’s revenue shortfall
If we look at GMCR’s historical sales data, there is a good amount of seasonality in it. Sales usually increase from the June Quarter to the September Quarter and then a big jump up comes in December. So, it is natural for investors to get disappointed when instead of an increase, they actually see a decrease from June to the September Quarter.
One obvious explanation is that the company pre-announced a K-Cup price increase during Q3 and some large chains probably built inventory prior to the raise. If we look at the data of June sales, it is likely the case. Historically, sales slightly decline from March quarter to June quarter. However this year it actually increased, supporting the above explanation.
|
| Dec | Mar | Jun | Sep | Full Year |
| FY2009 | 192,027 | 189,931 | 188,212 | 215,965 | 786,135 |
| YoY Change | 51.90% | 57.10% | 59.30% | 60.20% | 57.10% |
| Sequential Increase | 42.44% | -1.09% | -0.91% | 14.75% |
|
| FY2010 | 345,152 | 321,953 | 316,583 | 373,087 | 1,356,775 |
| YoY Change | 79.70% | 69.50% | 68.20% | 72.80% | 72.60% |
| Sequential Increase | 59.82% | -6.72% | -1.67% | 17.85% |
|
| FY2011 | 575,027 | 647,658 | 717,210 | 711,883 | 2,650,899 |
| YoY Change | 66.60% | 101.20% | 126.50% | 90.80% | 95.40% |
| Sequential Increase | 54.13% | 12.63% | 10.74% | -0.74% |
|
Even bears agree that the sales miss was primarily due to sales getting pulled forward to the June quarter from the September quarter. The only thing they differ on is they are alleging that management overstocked the supply chain to show increased sales in the June quarter. Given the scrutiny management is under after last year’s SEC inquiry, I see it unlikely. Why would a management which is under so close watch, artificially increase June quarter sales, when it doesn’t need to do it?
Either ways if “pull forward” in the demand is the only reason, it does not indicate anything regarding future sales trends. Thus 35% price decline is not justified in my opinion.
GMCR is undervalued even by Einhorn’s thesis
One of the main arguments in Einhorn’s thesis (pdf) was GMCR looked overvalued. If we take the after-hours price of $45, GMCR has corrected ~60% from its September high and is available at 17x forward earnings. In his own presentation, on page 66, Mr. Einhorn presented a case in which GMCR could post $3.50 in EPS instead of the $9.00 long term EPS target of SunTrust Robinson Humphrey's analyst. On a $3.50 EPS estimate GMCR is available at just 12x at the after hours trading price. Since Mr. Einhorn is having a big short position in the stock, he likely published a doomsday scenario. The truth is most likely in between what Mr. Einhorn is saying and what Suntrust’s analyst has published.
Valuation
Here is a table showing PE multiples of some of the peer companies.
| Ticker | Trailing PE | Current Year PE | Forward PE |
| 17.98 | 15.95 | 11.24 | |
| 41.66 | 38.44 | 32.21 | |
| 26.51 | 23.60 | 19.7 | |
| 18.18 | 14.86 | 13.58 | |
| 49.05 | 29.71 | 22.6 | |
| 18.96 | 15.31 | 13.79 | |
| Average | 28.72 | 22.98 | 18.85 |
GMCR’s stock price would be close to $50 even if we assume it's getting a multiple in line with the group. This means at least 12% upside from its after hours trading levels. A couple of quarters of good growth will help in gaining back investor confidence. The same thing happened after last year’s SEC inquiry. The stock plummeted to $26 and then quadrupled over the next few quarters. I won’t be surprised if history repeats itself.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: My immediate family member has a long position which was initiated near after hours lows yesterday. It is a short term trading position and can be sold anytime.
