Green Mountain's shocking plunge

Disappointing earnings triggered the coffee company's free fall Thursday, adding to investor concerns about spending and inventory.

By Kim Peterson Nov 10, 2011 1:38PM
Updated 4:25 p.m. ET

Thursday marked a stunning fall for Green Mountain Coffee Roasters (GMCR), a one-time stock market hotshot brought low by disappointing earnings.

Shares of the company, which makes Keurig single-cup brewing machines, plunged 39% to close at $40.89 after an earnings report Wednesday that, well, really wasn't all that bad. Analysts rushed to defend the stock, with one calling the investor response a "ridiculous market reaction."

Post continues below.
So are investors overdoing it, or is the company in trouble? Let's examine the details.

Green Mountain missed on profit and revenue for its fourth quarter. Earnings nearly tripled to $75.4 million, and revenue rose 91% to $712 million. It's a bizarre world where numbers like those amount to disappointment.

But that reflects the super-high expectations set on the stock, which had risen 250% in the past year before beginning to fall back in September. If you had bought $10,000 in stock a decade ago, your investment would now be worth about $263,000, The New York Times calculates.

Green Mountain could simply do no wrong for much of this year, clinching key deals on distribution and with other coffee providers.

One key move was getting Starbucks (SBUX) on board to provide its coffee and Tazo teas in the K-Cup packs used by Green Mountain's Keurig brewers.

It was all going so well -- and then along came David Einhorn. He's a hedge fund manager who has shorted Green Mountain and gave a detailed presentation in October laying out all the problems with the company.

Einhorn blasted the company's capital spending, saying it's growing much faster than the business. He described management as vague and said the company changes its financial presentations so often it's hard for investors to get a real grasp of the situation.

Shares fell nearly 15% after Einhorn's hourlong presentation and put the company on the defensive.

Executives were still recovering Wednesday. "We take the recent allegations of misconduct seriously," chief executive Larry Blanford told analysts in a conference call to discuss the quarterly earnings. "There is no misconduct, there is no wrongdoing." He added that "with success comes scrutiny and at times skepticism."

But the seeds of doubt Einhorn planted likely contributed to Thursday's sell-off. There were other concerns with capital spending and inventory levels that have risen to $672 million from $263 million a year ago.

Analysts are shaking their heads in disbelief at Thursday's stock tankage. Janney Capital said the plunge doesn't match the magnitude or significance of the revenue miss.

Indeed, Green Mountain's outlook for the next year does seem bright. The company estimates net sales will grow 60% to 65% and earnings will grow by 56% to 62%. Spending will still be high. The company estimates it will invest up to $700 million in capital expenditures.

The Motley Fool points out that Green Mountain is now the cheapest premium coffee stock. At $44, it has a forward-earnings multiple of 17. Compared that with multiples of 32 for Peet's Coffee (PEET), 28 for Caribou Coffee (CBOU) and 24 for Starbucks.

Clearly the stock has more volatility and uncertainty than most investors would like, particularly in the market's current climate. And the company's spending for the next year seems to be approaching unsustainable levels.

Without a clearer idea of how Green Mountain intends to support all that spending, Thursday's stock sell-off might be right on target.
Nov 10, 2011 3:02PM
Nothing shocking! Just another Crocs, KrispyCreme, Netflix or Soda.  Gravity works. Smile
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