What’s Up with David Einhorn’s Shorts: Green Mountain Coffee Roasters
David Einhorn announced his short position in Green Mountain Coffee Roasters (GMCR) in October 2011 at the Value Investing Congress. Shares began to plunge immediately, eventually bottoming at a 52 percent loss by about a month.
In his 110-page presentation, he accused the company of many transgressions. He noted that Green Mountain began in 1981 as a small café in rural Vermont, and enjoyed the effects of growth along with the expanding premium coffee industry in the 1990s. From 1991 to 2000, its revenues grew 25 percent a year. Then, from 2000 to 2005, growth slowed to 14% a year.
In 1998, it began to partner with Keurig, a single-cup coffee brewing machine maker to manufacture and sell the K-cups, and bought the whole company in 2006. Growth exploded at GMCR since then – revenue increased at a 57% CAGR from 2006 to 2010.
Shares of GMCR responded in kind, peaking around $107 a share in 2011, just before Einhorn questioned the situation in October. Then, in November, the company’s shares plunged 39 percent the day after it announced its first sales miss in two years. Sales were $711.9 million that quarter, up 91% over the same period in fiscal 2010, but far short of analysts’ expected $760 million.
"Our fiscal fourth quarter revenue growth of 91% was strong. This was off of our estimates as a result of a number of factors including changes in wholesale customer ordering patterns in our grocery and club channels despite steady consumer point-of-sale demand in those channels," GMCR CEO Lawrence Blanford said of the miss.
Einhorn gave his take on the shortfall in an exclusive interview with Reuters in December: “The thing about an investment like this is that there are really a lot of ways for us to come out well because the risk-reward for the stock is so poor. And there are so many problems that they don't all have to hit at the same time in order for us to get a good result. In terms of what actually did cause them to miss the quarter? It was largely a sales miss, which seemed to follow from the unexplained sales spike that we highlighted in the presentation,” he said.
The company’s stock seemed to level off after the fall though and had increased almost 10 percent by May, when it plunged a further 40% on lowered sales guidance. The price continued roughly flat for almost the rest of the year. In October, Einhorn reiterated his position on Green Mountain in his investor letter:
Regarding GMCR, we pointed out:
- It is implausible that the GMCR audit committee conducted a serious investigation of our allegations in a mere 23 days after last year’s Value Investing Congress;
- GMCR management has trivialized the competitive threat posed by Starbucks’ new Verismo coffee and espresso maker, and we see a risk that Starbucks will renegotiate or even walk away from its partnership with GMCR;
- GMCR’s key patents for K-Cups have expired leaving the company in a vulnerable position because:
- It is the high cost producer in what will become a highly competitive commodity manufacturing business;
- GMCR does not control any important brands (its license deals with Starbucks, Dunkin’ Donuts and Smuckers are subject to renegotiation);
- There are nine competitors who are either already producing or about to launch competitive K-Cups and will have substantial capacity by the end of next year;
- GMCR recently lowered the list price of many of its leading products by about 8 cents per K-Cup. This will likely have a large impact, as last quarter GMCR only made 8 cents per K-Cup.
When Einhorn revisited the presentation at the Value Investing Congress in October 2012, shares fell only 2 percent during the talk.
Since announcing fourth quarter results on Nov. 27, however, shares have pushed up almost 44 percent after earnings beat expectations. Net sales were $946.7 million, up 33 percent year over year, and earnings were $91.9 million, up 22% year over year (which included an additional week).
Ninety-percent of the company’s sales in fiscal year 2012 came from sales of its Keurig single-cup coffee brewing machines and related items. During the year it introduced two new brewing platforms, the Keurig Vue brewer and the Keurig Rivo Cappuccino and Latte system in partnership with Lavazza, along with multiple new beverages and a travel Vue model.
The company’s gross margin for fiscal year 2012 declined to 32.9 percent from 34.1 percent a year previously primarily because the company invested more in new products such as the Vue brewing system. The company also cited as a reason “an increase in single-serve pack obsolescence.”
The new coffee machines are intended to rival Starbucks (SBUX)’s new single-serve espresso maker, introduced in late 2012. Green Mountain also currently has a deal with Starbucks to sell K-cups for Keurig machines, which will continue even after competition intensifies between the two companies.
Green Mountain’s outlook for the first quarter of 2013 is total net sales growth in the range of 14% to 18%. For the full year 2013, it expects total net sales growth in the range of 15% to 20% over fiscal year 2012.
Green Mountain currently has a P/E of 18.4, P/S of 1.5 and P/B of 2.9. Einhorn has not revealed yet whether he is has sold his position in Green Mountain.
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