Green Mountain: Is the Ghost of David Einhorn Banished, or Still Lurking?

Hedge fund manager David Einhorn, whose cute slide presentation last October single-handedly turned one of the best investments ever into a huge loser, still likes to rail against Green Mountain Coffee Roasters (GMCR). Lately though, the mainstream investment community is tuning him out. Green Mountain’s share price is up some 60% in the past six months, as seen in a stock chart, helped in part by several buy recommendations that turned sentiment on the shares overwhelmingly positive.

GMCR Chart

GMCR data by YCharts

Does this mean Green Mountain fixed the problems that Einhorn so convincingly hyped last year? Einhorn doesn’t think so. He trashed the company again this October, repeating issues he sees ranging from misleading accounting to patent expirations to encroaching competition. Looking at the large amount of short interest on Green Mountain shares – some 40.5% of float at Nov. 15 – plenty of investors still agreed with him as late as a few weeks ago.

Certainly, Green Mountain’s immediate results post-slideshow made Einhorn seem prescient. For one thing, he was spot-on to question the company’s fantastic revenue projections that generally were responsible for its high share price. Green Mountain, which most notably sells single-cup coffee makers and the “K-Cups” of coffee for them, still had huge sales gains; just not as much as investors expected.

Nevertheless, Green Mountain management has made big strides in recent months toward regaining the investment community’s trust. The last two earnings reports beat projections, and the big investment banks seem comfortable with the company’s recalibrated revenue projections of 15% to 20% gains in 2013. But it really gained confidence by turning around the company’s negative cash flow – something Einhorn had pointed to as a striking weakness -- while initiating an unexpected rash of share repurchases. Investors were very happy about both.

GMCR Free Cash Flow TTM Chart

GMCR Free Cash Flow TTM data by YCharts

Green Mountain collected more backers late last month when it named Coca-Cola’s (KO) Brian Kelley as CEO and president. Kelley, who recently oversaw the massive integration of several companies to form Coca-Cola Refreshments, is expected to resolve nagging operational problems at Green Mountain, such as poor inventory planning. He started work on Monday.

A huge part of investors’ new comfort level with Green Mountain simply comes from the sheer depth of its share-price fall. Before Einhorn’s speech, Green Mountain shares were trading at some 71 times earnings and more than 5 times sales, fueled by near triple-digit annual revenue growth for several years. Investors often questioned those valuations, but few could pull themselves away from a stock that had increased fortunes 10-fold in four years. Valuations now are at a much more defensible PE ratio of 17 and 1.5 times sales. Dowdy old Starbucks (SBUX) trades at higher multiples on both counts.

Einhorn still sneers at Green Mountain’s numbers, citing a “lack of transparency” in the business. His original presentation accused the company of using skeevy accounting to artificially boost sales and earnings. An SEC investigation on the subject is in its third year now with no hint of an outcome. Green Mountain’s share price is sure to dive again if Einhorn proves at all right about this, both because real valuations would go higher and confidence would take a hit.

We’re sure Einhorn would like us to remind everyone that there was a lot more to his Green Mountain complaints in that 110-slide presentation. Particularly worrisome, for example, were his questions about long-term viability of the single-cup coffee maker industry, where a cuppa is expensive and competition is growing. So perhaps Einhorn didn’t see that cash flow turning around quite as quickly as it did. There are still a lot of ways he could be right.

Dee Gill, a contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine.



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