Green Mountain Coffee: We’re a Great Company, Buy Our Shares From Us
- Joshua M Brown
- October 20th, 2011
The bombshell presentation on the Green Mountain Coffee Roasters ($GMCR) short thesis by David Einhorn has been floating around all week, I just got around to going through it last night.
Full disclosure: I have zero long or short position here but I do use the company's product every day at home. A lot of people do which is why the stock has been such a homerun. Unfortunately, management may have pushed the envelope to keep the "growth story" alive.
Einhorn's bear case is:
1. Accounting is shady (unaccounted for revenue, especially in the last quarter - auditors are distancing themselves and the SEC has an open investigation ongoing)
2. Demand/market penetration is much different than what management predicts (management is making assumptions that the product has a lot more room for growth than what is reasonable)
3. The razor/razorblade model doesn't work when the razorblades that you sell profitably as a monopoly come off patent (k-cups will be wide open to competition beginning in 2012)
4. Inventories are being shuffled around and hidden to pretend that sales are being made that aren't (company truck drivers talk of shipments that are shuffled around from one warehouse to another)
But to me,you can forget all about the accounting shenanigans, my red flag comes even before you get to any of that. I am always highlyconcerned when management is highly promotional while making huge sales of their own stock. Even worse, Green Mountain insiders are blowing out of their stock while raising big money with secondaries. I came up in the biz involved with a lot of small and micro cap companies that did this stuff, it ends badly 100 times out of 100.
Here are the two most damning slides in Einhorn's deck along those lines:
You can buy this stock if you really want to, but just understand that management are sellers. Big time.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.