, founder of hedge fund Greenlight Capital, has moved markets
with his powerful presentations on stocks he has decided to short
and reaped sizable gains. The companies he targets typically have
to respond to accusations leveled at them and after some time has
passed, it becomes clearer whether Einhorn was right in his
assessment. Perhaps most famous are his short positions in
), St. Joe Company (
) and Green Mountain (
announced his short position in Green Mountain Coffee Roasters (
) in October 2011 at the Value Investing Congress. Shares began
to plunge immediately, eventually bottoming at a 52 percent loss
by about a month.
his 110-page presentation
, he accused the company of many transgressions. He noted that
Green Mountain began in 1981 as a small caf� 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
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
- 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
When Einhorn revisited the presentation at the Value Investing
Congress in October 2012, shares fell only 2 percent during the
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 (
)'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.
See David Einhorn's portfolio here. Also check out the
Undervalued Stocks, Top Growth Companies and High Yield stocks of
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