Monday, May 9, 2011

Short Idea: Green Mountain Coffee (copy from a post I did on coner of brk/ffh)

This will not be a full write up, but a short summary of the company and it's problems. This idea has been fleshed out on other sites but I wanted to share this idea with the board since short ideas are generally not presented. Links will be provided at the end of the post for further investigation.

[b]Summary of the Business[/b]
Green Mountain Coffee Roasters Inc. makes most of their money from selling a specialty single cup coffee maker called a K-cup. The business has grown rapidly with revenues of 341M in 2007, to revenues of 1,356M in 2007.

[b]Fundamental Statistics[/b] via CapitalIQ

Share Price:
Market Cap: 10.70B
Enterprise Value: 11.81B
Trailing P/E (ttm): 94.90
Forward P/E: 41.40
Price/Sales (ttm): 5.64
Price/Book : 10.30
Enterprise Value/Revenue (ttm): 6.18
Enterprise Value/EBITDA (ttm): 37.18

[u]income statement[/u]
Revenue (ttm): 1.91B
Revenue Per Share (ttm): 13.98
Qtrly Revenue Growth (yoy): 101.20%
Gross Profit (ttm): 425.76M
EBITDA (ttm): 317.57M
Net Income Avl to Common (ttm): 113.18M
Diluted EPS (ttm): 0.79
Qtrly Earnings Growth (yoy): 171.80%

Profit Margin (ttm): 5.92%
Operating Margin (ttm): 12.67%

[u]balance sheet[/u]
Balance Sheet
Total Cash (mrq): 33.99M
Total Cash Per Share (mrq): 0.24
Total Debt (mrq): 1.06B
Total Debt/Equity (mrq): 99.82
Current Ratio (mrq): 2.08
Book Value Per Share (mrq): 7.36

[u]stock price history[/u]
52-Week High (May 4, 2011)3: 78.45
52-Week Low (Jun 8, 2010)3: 21.83

[b]Reasons for Shorting[/b]

[u]K-Cup Patent expiring in 2012[/u]

Currently, Green Mountain has the sole right to produce K-cups once the patent is expired, everyone will be able to make their on K-cup brewing system. This means Kraft and P&G will have their shot at Green Mountains K-cup brewers. Enviably margins should shorten due to competition.

[u]Insider Selling[/u] via MSN Money

Clear insider selling and at much lower prices than the stock is currently trading at.

03/15/11 STILLER ROBERT P Gift 11,144 $58.99 657,384.56
03/10/11 STACY MICHELLE V Sold 9,375 $55.54 520,719.38
03/10/11 STACY MICHELLE V Exercise 9,375 $6.20 58,125.00
02/14/11 STACY MICHELLE V Sold 10,000 $45.13 451,300.00
02/14/11 STACY MICHELLE V Exercise 10,000 $6.20 62,000.00
02/10/11 STILLER ROBERT P Gift 6,360 $41.36 263,049.59
02/07/11 STACY MICHELLE V Sold 15,561 $40.00 622,440.00
02/07/11 STACY MICHELLE V Exercise 15,561 $7.67 119,352.87
12/13/10 MCCREARY RICHARD SCOTT Exercise 10,000 $31.96 319,600.00
11/05/10 STACY MICHELLE V Sold 10,000 $35.00 350,000.00
11/05/10 STACY MICHELLE V Exercise 10,000 $6.20 62,000.00
09/21/10 STACY MICHELLE V* Sold 5,000 $37.00 185,000.00
09/21/10 STACY MICHELLE V* Exercise 5,000 $7.67 38,350.00
09/13/10 STACY MICHELLE V Sold 5,000 $35.40 177,000.00
09/13/10 STACY MICHELLE V Exercise 5,000 $6.20 31,000.00
09/13/10 STACY MICHELLE V* Sold 5,000 $35.40 177,000.00
09/13/10 STACY MICHELLE V* Exercise 5,000 $6.20 31,000.00
08/18/10 MCCREARY RICHARD SCOTT Sold 200,000 $33.08 6.62 Mil
08/18/10 MCCREARY RICHARD SCOTT Exercise 200,000 $1.47 294,000.00

[u]Share Dilution[/u]

Green Mountain is doing a second offering of 8,189,000 shares at $71 a shares or a 5.7% increase total share outstanding. If Green Mountain is such a great business, why dilute your holdings? Although, I do agree the management, they are getting a great price for the dilution.

[u]Possible Funny Accounting[/u]

The share price recently jumped with the company beat analyst estimates. Although, there might have been some funny accounting taking place due to a negative sales provision. Which could mean the company had previously over estimated their sales return and needed to lower or is using it to play with the earnings. Oddly enough, if the company didn't report the negative provision, they would have missed their earnings estimate which would have hurt their recent equity raise. Herb Greenberg expanded on this on CNBC ([url][/url])

The SEC is also currently investigating their accounting practices.

[b]Risks of Shorting Green Mountain[/b]

Green Mountain could continue to grow at large rates, competition from Kraft and P&G might never materialize. Green Mountain might also be bought out from a competitor, hoping to get the leg up in K-cups before the patent runs out. Also, 20% of the float is currently float which might cause a short squeeze.


Green Mountain has all the qualities of a great short. Major product is about to run off patent, possible funny accounting, insider selling and share dilution. All of that wrapped around a rather forward P/E of 41 and current P/E of 94. My recommendation for a short I believe is still valid. I believe this write up isn't comprehensive enough for someone to make that decision and further investigation is required.

I hope for a good discussion with the board members.

[i]Links for Further Investigation[/i]
1. Is Green Mountain Coffee Roasters Shuffling the Beans to Beat Earnings Expectations? via whitecollarfraud

2. The Short Case for Green Mountain Coffee Roasters via Viking Capital

3. Green Mountain Coffee: A Prime Short Candidate via Whopper Investments

4. Green Mountain Coffee Roasters: Short Opportunity Brewing via The Oxen Group

4. Green Mountain Coffee: More Shares and More Questions via Jason Merriam

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