In October 19, 2011 David Einhorn of Greenlight Capital made a presentation at the Value Investing Congress about Green Mountain Coffee Roasters (GMCR). At the presentation he explained why Green Mountain Coffee was worth far less than what it was trading for ($68.09 at the time)
David Einhorn was made famous by his very public battles with companies he was shorting like Allied Capital and Lehman Brothers. Much like we learned with Lehman Brothers, even if people continue to invest, a company that is not bringing in cash is in danger of bankruptcy. Green Mountain Coffee has dropped 68% since David made his presentation.
Between January 2008 and September 2011 investors fell in love with Green Mountain Coffee Roasters (GMCR) and were buying the stock like crazy even though the PE ratio was above 60, in January 2011 the PE ratio was a whopping 85.
Yes, it is true that Green Mountain Coffee was a promising company, revenues were growing exponentially, from 1991 to 2000 GMCR’s revenues grew 25% a year, from 2000 to 2005 growth slowed to 14% a year. While growth was slower it remained very consistent for a young company with a promising product.
In 1998, Keurig, partnered with GMCR to manufacture and sell Keurig’s patented K-cups. Keurig introduced its single-cup brewing system to home users in 2002. During that same year GMCR acquired 42% of Keurig for $15M. GMCR acquired the remainder of Keurig in June 2006 for $104M.
Since the Keuring acquisition in 2006 GMCR evolved and revenues grew at a 57% CAGR from 2006 to 2010.
From every angle, this company looked incredibly exciting, until you realized the business model wasn’t producing any cash. When you look at free cash flow, you realized that since December 2007 the free cash flow has been consistently negative every single quarter.
When a company can generates positive free cash flow, it reflects good investments the company has made that are generating excess cash. At GMCR that wasn’t the case. Since September 2009 cash from financing growth outpaced cash from operations growth and much of it came from new stock issuance. At the same time Long Term Debt was growing rapidly, from $107.3M in 2008 to $1.08B in December 2010.
While GMCR was raising big money with secondaries, insiders were blowing out their stock, GMCR insiders netted $172 million in 2011. Directors, Officers, CEO, CFO and General Counsel were selling millions worth of stock.
After Green Mountain Coffee Roasters reported its earnings for its fiscal 4th quarter in 2011, shares dropped by over 30 percent in after hours trading. In May 2012 the stock dropped an additional 40% in extended hours after the company reported weaker than expected earnings and a huge revenue miss. Green Mountain Coffee (GMCR) also lowered earnings guidance as K-Cup sales plummeted. A stock that was trading around $110 in mid September of 2011 has dropped to $21.27 today, in other words an investor in GMCR 10 months ago have lost 80% of his money.
Potential investor only looking at company growth were completely missing the cash flow and how the company was being financed. This is what I call financial stupidity. The story of GMCR repeats itself in the stock market year after year, and a lot of people even the smart ones are being caught in these traps.
Recently, Dyer & Berens LLP announced that it has filed a class action lawsuit in the United States District Court in the District of Vermont on behalf of purchasers of Green Mountain Coffee Roasters, common stock during the period between February 2, 2012 and May 2, 2012. The complaint contains allegations that, during the Class Period, defendants issued materially false and misleading statements regarding the Company’s growth and demand for its products. Specifically, the suit alleges that the defendants misrepresented and/or failed to disclose the following adverse facts: that demand for the Company’s brewers and portion packs had slowed; that the Company’s models for predicting consumer demand were flawed and ineffective; and that defendants lacked a reasonable basis for their positive statements about the Company and its future prospects.
I don’t know how this case will be decided, what I do know for sure is that if you continue chasing fast growing companies and without regard for the fact that they are not producing any a positive cash flow, you will always be a loser.
Regardless of all this mess, I think at the current price level GMCR is offering a decent entry point for investors. I don’t expect the stock to recover anytime soon, but I also don’t expect the company to file for bankruptcy either. Now that the stock is relatively fairly priced, it may have some potential for growth. I opened a small position in my portfolio (less that 1%) so I can track the company and see where it goes from here. Of course, only time will tell if they GMCR learned their lessons.
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