Green Mountain Coffee Down Over 10% After David Einhorn Goes Short

Oct 17, 2011
J. Webster
Comments Off on Green Mountain Coffee Down Over 10% After David Einhorn Goes Short

It’s probably a big mistake not to talk to David Einhorn if he wants to speak to you. Einhorn, of Green Light Capital, said Green Mountain coffee (GMCR) declined to speak to him citing a quiet period. Sure, this might be true, but you don’t want to upset Mr. Einhorn. He’s the type of person to dig deep enough to find something that doesn’t look good. And he’s not afraid to hang on either, until his investing thesis comes true. Even worse, he might just write a book about it afterwards.

Basically, if he’s taken the time to make a presentation about your company in a negative way, you better gets things right quick like. See the Allied Capital story if you don’t believe me.

At the Value Investing Congress in New York, Einhorn said Green Mountain has a “litany of accounting questions” and added that its latest earnings were “perhaps too good to be true.” Wow. That’s not good. You don’t want to upset this poker playing investor. When Einhorn gets mad and bites, he doesn’t let go easily. What’s worse, he announced that he shorting Green Mountain’s stock. This is NOT good.

Perhaps the biggest issue that Einhorn sited was Green Mountain’s “looming patent issue” on its single-serve K-Cups or Keurig Cups. Right now, Green Mountain has this market cornered, and recently made deals with Dunkin’ Donuts and Starbucks to sell K-Cups of their coffee, but what is going to happen when the K-Cup patent expires? I’m assuming the the deals with Dunkin’ and Starbucks will be dead. As they just won’t need Green Mountain anymore, and they’ll just do their own. This then opens the door to Maxwell House or Peet’s to make their own K-Cups.

Instead of the $9 per share in potential earnings bulls believe the company is capable of, Einhorn believes the potential earnings power is closer to $3.50 a share and that at that level the company should be trading “at a market multiple” not the “premium valuation” of 57x forward earnings at which it currently changes hands. (Forbes)

Einhorn also said Green Mountain, once called the ipod of coffee, is more of a luxury item, what with the Keurig machine being very expensive. The machines start at $80 and go up to $250. There is a good run down of what else Einhorn said at the conference about Green Mountain here.

The full slide show of David Einhorn’s presentation is posted here, it’s called GAAP-uccino.

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