Legendary hedge fund manager David Einhorn has gone from bashing Florida real estate to bashing coffee beans.
Shares of Green Mountain Coffee Roasters (Nasdaq: GMCR ) tumbled 10% yesterday, after Einhorn detailed his bearish thesis for shorting the company behind the Keurig single-cup coffeemaker.
There isn't really anything new in Einhorn's argument. He's pointing to the same patent expirations, accounting concerns, and frothy valuations that have burned Green Mountain bears in recent years. I butted heads with bears including Fusion Investing's Dean Morel (who is an investment analyst for The Motley Fool Australia) and CNBC's Herb Greenberg at much lower price points last year.
The stock has soared 166% since Greenberg bashed Green Mountain's accounting practices 13 months ago -- and that's including yesterday's drop.
I'm sitting in a cozy "I told you so" seat on this one. I recommended Green Mountain to subscribers of the Rule Breakers growth newsletter service at a split-adjusted price of $8.93 a little over two years ago. It remains an active pick, sporting a juicy 824% return. In other words, it's going to take a lot of dark days before I begin wondering if crow is available in K-Cup form.
I'm not smarter than Greenberg. I'm certainly not smarter than Einhorn. That's the guy that nailed Lehman's undoing. It's he -- and not me -- that almost bagged the New York Mets this summer. However, I haven't had a problem calling out Greenberg in the past. Why not call Einhorn wrong on this particular call?
Timing is everything
The one thing that Einhorn has going for him is that – as this is a fresh bearish call on one of the hottest stocks in recent years -- he's ahead of former naysayers. Green Mountain is more expensive now than it was during previous knocks. The patent expiration deadlines are closer. The accounting allegations haven't been entirely cleared up.
However, time also isn't on his side because Green Mountain is far more ubiquitous now. It wasn't until earlier this year that Starbucks (Nasdaq: SBUX ) and Dunkin' Brands (Nasdaq: DNKN ) inked deals to hop on the K-Cup bandwagon. These aren't really the kind of moves one would expect if Green Mountain was about to turn into a pumpkin roast because two of its dozens of patents were set to expire next year.
Green Mountain is bigger now. Net sales soared 127% higher in its latest quarter, and earnings grew even faster! It's not all organic. There have been K-Cup makers and regional java heavies acquired along the way, but who would argue that this market isn't as big as the market believes it to be?
Green Mountain estimates that there's now a Keurig in 8% to 10% of the homes in this country. We're not talking SodaStream's (Nasdaq: SODA ) 20% market penetration in Sweden, but this is a big number in a big country that drinks a lot of coffee.
It gets better.
In its latest conference call, Green Mountain estimates that 25% of the coffeemakers sold in this country were K-Cup brewers. In other words, Green Mountain will continue to gobble up more than 10% of the home market as older coffee machines break down or simply get replaced.
It gets better.
Green Mountain's java brewer sales are growing considerably faster than the other 75%, so it would be premature to even call 25% the ceiling here.
It gets better.
Just last week, Jarden's (NYSE: JAH ) Mr. Coffee announced that it was expanding its line of coffeemakers with licensed Keurig-brewed technology.
Patents and profits
How many stocks do you know whose earnings estimates have been climbing in recent months? Three months ago, analysts figured that Green Mountain would earn $1.48 a share this year and $2.14 a share come 2012. Now those same pros see a profit of $1.65 a share in the fiscal 2011 that ended last month and $2.61 a share in the fiscal year that just began.
Few will argue that Green Mountain is a bargain at 32 times forward earnings, but is it so outlandish when we're talking about a company projected to grow organic revenue and profitability at a roughly 60% clip?
Before you answer, consider that Green Mountain has beaten analyst quarterly estimates by 10% to 36% over the past year. In other words, the eventual earnings should be higher -- and the projected P/E lower -- than what we're seeing now.
What about fiscal 2013? Isn't that the year where this will all fall apart according to patent expirations in 2012? Tell that to the analysts, who are expecting earnings to climb 47% to $3.87 a share.
It's true that the two patents protecting K-Cup portion packs in this country are set to expire next year, putting an end to a need to pay Green Mountain a few cents for every licensed K-Cup sold. Let's go over a few points that bears aren't addressing:
- No licensing fees would translate into cheaper K-Cups, which in turn would grow demand for Keurig brewers that are patent- and brand-protected.
- Green Mountain hasn't historically approached brewers as a profit center, but it will if it can't cash in on the K-Cup end.
- All of the financials-blurring acquisitions over the years have been done in anticipation of this very event. From Diedrich to Timothy's to Van Houtte, Green Mountain already owns its best-selling K-Cup providers. In other words, it's the biggest beneficiary -- in a roundabout way -- of the patent expiration.
This doesn't even end there, though. Green Mountain is working on a new espresso-based system and it's also developing a new Keurig-filtered platform that may present new and extended patent protections.
Stealing a page out of the Coca-Cola (NYSE: KO ) playbook, Green Mountain is also exploring K-Cup beverages with functional and wellness benefits. Did you think that its Swiss Miss deal with ConAgra (NYSE: CAG ) and its recent rollout of "over ice" cool beverages was the end of the line?
Green Mountain is cheaper than you think and earlier in its product cycle than you believe, Einhorn.
Short it at your own risk.
If you want to follow this caffeinated saga, add Green Mountain Coffee Roasters to My Watchlist.