Is David Einhorn Piping Hot or Iced Cold on Green Mountain?

At the Value Investing Congress, Greenlight Capital’s David Einhorn came out with a scathing short thesis on Green Mountain Coffee Roasters. He essentially called the company an accounting fraud. Einhorn also said that the company does not deserve anywhere near the multiple it has been afforded.

His presentation, found here, courtesy of Business Insider, was a sight to behold, and even ended with a bear in the coffee cup at the end of the presentation as a playful picture on his short thesis.

Einhorn mentioned the negative bias he has towards the cash flow from operations, and that it will actually get worse before it gets better. The return on invested capital is 16.3%, and he believes it is difficult to justify the high earnings multiple Green Mountain has been afforded. The company’s’ acquisition policy has been poor, with GMCR paying high prices to limit competition of the K-Cup and to buy its partners.

The company is attempting to make improvements on existing patents for the K-Cup, but Einhorn believes getting the customer to switch to this would be difficult, given an affinity for the Keuring brewing system.

Now it appears the bulls are fighting back.

SunTrust analyst William Chappell, who Einhorn took some of the maths from, is saying that Einhorn is wrong, and is reiterating his Buy rating and $120 price target.

In Chappell’s note, he wrote,

“As GMCR has previously said, it will make the same penny profit per k-cup on its brands as it will on partnered brands such as SBUX and Dunkin’ Brands. According to the investor, SBUX has said that it will make 2/3 of the profit and GMCR will make 1/3 of the total profit on each cup which, for the sake of argument, we will assume is correct. The problem lies in the investor’s maths. Based on slide 35 he indicated that the total potential profit to share (i.e. split 2/3 to 1/3) is $0.22/k-cup. However, his analysis includes the assumption that BOTH companies will be paying $0.15/k‐cup for packaging when, in fact, SBUX is paying GMCR for the packaging services. If we eliminate this double‐count and assume that the cost of packaging is closer to $0.04-$0.05 per k-cup (based on prior statements by GMCR), the total profit to split is closer to $0.33/cup. If we then say that GMCR only takes a 1/3 of that profit per cup it would equate to $0.11, which is in line with our prior maths.”

Chappell also goes on to say that non‐licensed private label cups having a 20% share of the private label market is statistically impossible, because outside of water and milk, there are no beverage categories where the private label owns 20% of the market. He notes that private label coffee only accounts for 10%, and has not moved off this 10% level for a decade.

Suntrust also goes on to talk about the accounting fraud that Einhorn mentioned in slides 90 and 91. Suntrust said Green Mountain has already been acquitted of this in the courts, and to bring it up again would be double jeopardy. Double jeopardy is being tried for a crime twice.

In the days following the presentation, Green Mountain has lost almost a quarter of its market cap, as Einhorn believes the company is more likely to earn $3.50 in the coming years, as opposed to the $9 that the bulls think.

What do you think? Is Einhorn piping hot on his short thesis, or is his cup of coffee getting cold?

 

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