The Case for Shorting Green Mountain Coffee – Put in Perspective
Einhorn certainly deserves to be followed with his shorts. His most recent publicized short was St. Joe (JOE), the controversial position he held against Bruce Berkowitz. With Bruce Berkowitz in dismal these days, St. Joe stock is moving favorably toward Einhorn.
With this article we would like to put David Einhorn’s short thesis in the perspective of GuruFocus charts and features. We will display the positive and negative sides of Green Mountain Coffee Roasters Inc. (GMCR).
Breathtaking Revenue and Earnings Growth
Check out the charts in 10-year financial page, we see that the company’s revenue grew 34% a year over the past 10 years, and 55% a year over the past 5 years. In the meantime, earnings grew 26% a year over the past 10 years. Earnings per share grew 70% a year over the past 5 years.
Declining Gross Margin
In the mean time, the gross margin has been in decline. Usually a decline in profit margin indicates that the business is facing price pressure, or it is become less efficient as it grows. In the case of Green Mountain, the cost of goods sold is growing faster than the revenue. The company is facing price increase of materials. But it cannot pass all of those to customers.
Negative Free Cash Flow
As pointed by David Einhorn, even as the company grows at astonishing rate, it does not generate much free cash flow, as indicated in the chart above. This is also from the 10-year financial page.
Issue New Shares
Since the company does not generate enough free cash flow, to fuel its growth, the company has to raise more capital. Green Mountain raises capital by issuing new shares. As a result, the company’s number of shares outstanding continues to increase. See below (from 10-year financial page):
Historical High Valuations
In the meantime, the company is sold at historical high P/E and P/S values (from 10-year valuation page), as indicated by the charts below.
As discussed many times by our readers, being overvalued itself is not an enough for stock prices to decline. But David Einhorn certainly has spotted a catalyst here, which is the expiration of the company’s patents. Sure the stock price has declined. But on the other hand, since so many investors are following David Einhorn, he himself might be the ultimate catalyst here.