Eyeing Financial Report Clues From Netflix And Green Mountain Coffee

Includes: GMCR, NFLX
by: Jason Merriam

In our almost two decades as financial statement “sleuths,” one thing is certain. Ignoring the changes between relationships in the reported numbers can be dangerous and costly.

Clients and investors who follow our work know we have been bearish on Netflix (NASDAQ:NFLX) and Green Mountain Coffee (NASDAQ:GMCR) for quite a while.

NFLX reported yesterday (10-24-11) and GMCR has not yet announced a date for earnings. Both companies in our view articulate why it is important to pay attention to the clues provided in a company’s financial statements.

Netflix: Beleaguered DVD and streaming video provider NFLX reported a $0.21 earnings beat in Q3, but (not surprisingly) warned that Q4 earnings and margins would be lower than consensus estimates.

NFLX shares were down -27% in after hours trading on top of the almost 60% decline prior to the Q3 report.

Although the company has been signing a flurry of new content deals recently, content deals don’t come cheap. In addition to the expense issue, our analysis continues to indicate poor earnings quality and liquidity problems for NFLX. There are simply too much non-cash components in the earnings statement and not enough actual “cash.”

That said, we believe management’s screw-ups this past quarter were the manifestation of a company facing a liquidity crisis.

Green Mountain Coffee: Vermont based Green Mountain has not yet announced a date for earnings. GMCR shares received a 30% haircut following an intensive bear presentation from hedge fund manager David Einhorn.

GMCR is another stock with heavy reliance upon balance sheet accounting and we will be watching the Q4 and year-end earnings report with interest. Unlike the above mentioned NFLX, GMCR just completed a massive secondary.

It didn’t surprise us that Sun Trust analyst Bill Chappell was quick to shoot down Einhorn’s short thesis. His firm is affiliated with the co-lead manager of GMCR’s recent secondary. It is also notable that GMCR insiders sold a big block of shares as part of the recent offering and have continued to unload shares following the secondary.

Keep in mind GMCR remains under investigation by the SEC. For investors to assume that because the SEC has not formally accused GMCR of accounting or disclosure fraud, doesn’t make it a moot point...yet.

In fact, Sun Trust analyst Chappell and other bulls argue that GMCR has already restated earnings for FY08, ’09 and ’10. Yet, it reminds me of something my mentor hammered home years ago. The cockroach theory; if you see one, there’s a likely chance you will see more.

Finally, we view Monday's relief rally in GMCR’s shares as a bit of a short squeeze. Thus, we will be keenly interested in how GMCR reports its Q4 and year-end audited numbers.

From the wacky but you never know department: The public and heated debate between GMCR bulls and bears opens the possibility to another potential scenario. Given all the attention, market cap decline and controversy facing GMCR, how would investors react if GMCR were to delay filing its 10K? Food for thought.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.