WHITNEY TILSON: Here's 6 Reasons I'm Long Netflix And Short Green Mountain

Whitney Tilson’s T2 Partners is currently long Netflix and short Green Mountain Coffee Roasters.  Tilson notes that Netflix and Green Mountain share some similarities from an income statement perspective. (See below.)  However, he thinks that’s just about all they have in common.

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Photo: T2 Partners LLC

In a new report, Tilson outlines major differences between the two companies that justify his long and short positions.  He also gives much credit to Greenlight Capital’s David Einhorn for its devastating criticism of Green Mountain.

Guidance

  • Green Mountain gave strong guidance and analysts are bullish.
  • Netflix gave poor guidance and analysts are bearish.

Tilson believes expectations for Green Mountain will soon come down.

Source: T2 Partners LLC

Market cap

  • Green Mountain's market cap is $7.0 billion.
  • Netflix's market cap is $4.7 billion.

Because they have similar sales and profits, Tilson believes Green Mountain faces more downside risk and is less likely to be the target of an acquisition.

Source: T2 Partners LLC

Patents

  • Green Mountain relies on two patents that expire on September 16, 2012.
  • Netflix has no patent risks.

Tilson believes Green Mountain will face considerable competition once its patents expire.

Source: T2 Partners LLC

SEC investigations

  • Green Mountain is under investigation by the SEC.
  • Netflix isn't.

Tilson credits David Einhorn for identifying major red flags in Green Mountain's accounting, which may be used by the SEC.

Source: T2 Partners LLC

Goodwill

  • Green Mountain may have overpaid for three acquisitions (total of $1.4 billion) over the past two years.
  • Netflix has made no acquisitions.

Tilson points to Einhorn's concern about the acquisitions: 'The very high allocations to Goodwill raise suspicion about earnings quality.' Green Mountain's income statement would take a hit if it ever had to write down that goodwill.

Source: T2 Partners LLC

Balance sheet issues

  • Green Mountain's free cash flow is -$282 million on soaring inventories and capital expenditures.
  • Netflix's free cash flow is +$201 million.

Tilson questions how Green Mountain will fund future capital expenditures as the company's balance sheet is already strained.

Source: T2 Partners LLC

Conclusion

'We're long Netflix because we think the bad news is out, we like the company's balance sheet and cash flows, and see few red flags. In contrast, with Green Mountain, we think there is much more bad news to come, are very concerned about the company's balance sheet and cash flows, and see many red flags.'

Source: T2 Partners LLC

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