David Einhorn's Thoughts on Vodafone, Green Mountain Coffee - Overview
Green Mountain Coffee Roasters (GMCR)
David Einhorn called Green Mountain “one of the tougher things that has gone on in our portfolio this year,” for good reason. The stock is up 212% over the past 12 months. But it has not yet returned to its heights before Einhorn’s public takedown of the company at the Value Investing Congress on Oct. 17, 2011. The revelation of a Greenlight Capital short position cut the stock price from over $92 to less than $44 within a month.
Green Mountain is trading for $75.26 Wednesday, having eased off of a 52-week high of $89.66 reached last month.
Einhorn still intends to stay with his short position. He said on Bloomberg:
“We remain as we do, that the books are over-caffeinated if you would. The company says that it sells a lot of coffee. There’s no doubt they sell a lot of coffee. We don’t think they sell anywhere near as much as they say, and there’s some real discrepancies in the accounts. They had an analyst day a few weeks ago and they were asked to explain the numbers, and the CEO’s cavalier response was look, we don’t do straight math, and we’re not going to get into this now. Well, if you’re not going to get into this now at an investor conference, when are you going to get into it?”
He continued: “There’s a lot of ways I think for Green Mountain to pan out for us, this year it hasn’t been panning out for us. I look at it, the competition is increasing, they’re losing market shares in their stores, their platform has been commoditized, anyone can make a k-cup, the supply is now out there, the prices are falling, I think that they’re going to miss on the business side from an earnings perspective sometime over the next year, and ultimately they’re going to be commoditized away. In addition, you have the regulatory risk that somebody actually wakes up one day and says look, these numbers aren’t what they’re represented to be.”
Green Mountain started out in 1981 as a small Vermont coffee shop, and partnered with Keurig to manufacture and sell its individual-sized K-cups. In 2006 Green Mountain bought Keurig for $104 million, and has had robust growth. Revenue per share increased at a rate of 53.8% and EBITDA per share at a rate of 72.8% annually over the past five years.
Growth in the company’s fiscal third quarter was at the low end of its expectations with 11% revenue growth while GAAP net income increased 59%. This places net sales and earnings for the first three quarters of the year up 14% and 32%, respectively, over the same period last year, reflecting slowing growth.
Last year revenues grew 46% and earnings grew 81.5% over the previous year.
The company currently has a P/E of 26.5, P/B of 4.5 and P/S of 2.78.
Einhorn holds 1,373,896 shares of Vodafone as of the end of the second quarter. He initially bought 1.6 million in the fourth quarter of 2012 when the price averaged $27, then reduced 226,104 shares in the second quarter of 2013 when the price averaged $29. Verizon shares have climbed to almost $36 each on Wednesday.
“We’re not really participants I the high grade credit market, that’s not really our thing. Our role in this was we own Vodafone, which was selling its stake to Verizon Wireless… When we bought it, you were getting pretty much no credit for their stake in Verizon Wireless. Now we see that that was a really valuable stake, I think $130 billion or something like that. I think Vodafone remains pretty attractive because once you strip out the consideration you’re getting for Verizon, the rest of the European business is a pretty cheap value.”
“I think this is Vodafone’s exit from the U.S. If anything, they could ultimately become a target for someone like AT&T that wants to get more exposure into Europe.”
When asked about whether Vodafone could have squeezed more money out of the Verizon deal, Einhorn replied:
“I would give Vodafone an A or maybe an A+ on this negotiation. You know, Verizon took a very aggressive tack with them for a lot of years, saying you’re a minority, we’re not going to give you a dividend. Then eventually Verizon needed a dividend so they started paying it, but sporadically. And they really tried to squeeze these guys out. They finally came in the spring and said maybe we’ll whatever. Then it turned out that they couldn’t bridge the bid-ask, and Vodafone held out. And eventually Verizon came back to the table and they paid a higher price now than I think they would have even have had to pay in the spring.”
He also still sees value in Vodafone as an independent company without Verizon:
“But Vodafone is not mostly a wireline business, mostly they’re cellular in Europe. So you have that wireless component there. When you strip out the Verizon Wireless valuation, you’re buying it for about two turns of EBITDA less than comparable companies. And I think it actually has better prospects, better growth and a better network than many of its peers.”
Einhorn is referring to the deal reached on Sept. 2 in which Verizon (VZN) agreed to purchase Vodafone’s U.S. group which consisted primarily of a 45% Verizon Wireless stake for $130 billion in mostly cash and stock. Verizon said the deal would immediately increase earnings per share by 10%.
Verizon shareholders received a 53 cent per share dividend from the deal.
Vodafone returned all of the Verizon shares and $23.9 billion in cash to shareholders and use the proceeds in a new investment initiative called “Project Spring” through which it will invest up to £6 over the next three fiscal years back into growing the business.
Verizon shares have risen 42% year to date to $35.83 Wednesday. The company trades with a P/E of 261.6, P/B of 1.5 and P/S of 2.42.
See David Einhorn’s portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of David Einhorn.
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