By Jonathan Chen
The company has been in the news with Greenlight Capital's David Einhorn saying at the Value Investing Congress that he was short the stock on a number of different reasons.
The company reported fourth quarter earnings of 47 cents per share on $711.90 million in revenues. Wall Street was looking for earnings of 48 cents per share on $760.48 million in revenues. The company said that 83% of its fourth quarter sales were derived from Keurig. The earnings miss has caused a massive plunge in the stock today, down almost 40% as of the time of this article.
"With 95% annual revenue growth over last year the business continues to demonstrate extraordinary momentum as a result of broad consumer adoption of the Keurig Single Cup Brewing system," said Lawrence J. Blanford, president and CEO of GMCR, in a company release.
Green Mountain expects 2012 net sales to be up 60 to 65 percent. The company also said that it expects first quarter earnings of 35 to 40 cents per share, up from 35 cents per share that Wall Street is expecting, but Wall Street does not care. Green Mountain is a momentum stock and was trading at a very high valuation. Any slip in momentum and apparent revenue slowdown has caused a rush to the exits for investors.
The company blamed a decline in fourth quarter orders, higher coffee costs for higher inventory levels, and said that it overestimated K-Cup sales during the fourth quarter. That is exactly what Einhorn's thesis is; that the market for K-Cups is getting saturated and that Green Mountain is no longer a growth company at this point.
Bank of America came out defending the company this morning, and reiterating its $90 price target, but that is almost 120% away from where shares are currently trading. Bank of America "continue[s] to believe end demand signals indicate that momentum has not broken."
Einhorn believes otherwise. He believes the company is going to earn $3 per share in the next few years, where the bulls on the name believe it will earn $9.50 per share in a few years. At current valuations, that would mean the company is trading at about five times those expected earnings, but many, including T2's Whitney Tilson do not believe those estimates. Tilson went on CNBC last night and said that Green Mountain Coffee is cheap if you believe the guidance, however, he does not believe it.
There have many been quite a few sell-side analysts who have come out in defense of the name, including SunTrust analyst William Chappell - Einhorn used some of Chappell's math during the presentation. The company has become a soap opera, as many are trying to defend it to no avail.
Shares have lost 53% since Einhorn's presentation, and there is the chance that Einhorn could cover his short position. It does seem likely that the downward momentum is continuing, so Einhorn may want to squeeze this short to the last drop.
Traders who believe that Einhorn is wrong might want to consider the following trades:
- There is a heavy short interest in GMCR, and if the company's latest earnings blip is just a blip, shorts will be forced to cover.
Traders who believe that Einhorn will ultimately be proven right may consider alternate positions:
- Einhorn has had a great track record on the short side, most notably Lehman Bros. If Green Mountain is unable to keep up the growth and is reaching near saturation as Einhorn suggests, the bulls could be in for an iced cold sip of justice.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.