Why Green Mountain's Shares Got Pummeled Today

By Austin Smith | More Articles
November 9, 2011 | Comments (4)

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Green Mountain Coffee Roasters (Nasdaq: GMCR ) shares got absolutely slammed today as the company missed earnings estimates and as changes in consumers' wholesale buying habits shifted.

Shares are down 34% on the news after hours, effectively erasing more than $3 billion in market value overnight.

This may be surprising to some observers, as revenue was up more than 90%. But ultimately, Green Mountain missed estimates, falling short by almost $50 million.

This is another blow to Green Mountain after having had its shares pretty effectively wrecked by David Einhorn after he called out potential accounting shenanigans at the company. I agree with Einhorn and have said so in the past. There are big question marks looming in the future of Green Mountain's K-Cup patents, which are set to expire. I also believe it has an expensive spending habit. It consistently turns out negative free cash flow, and its upcoming plan to expand its Vermont operations and grow the workforce by as much as 30% only underlines my point.

One key takeaway is that Green Mountain overestimated K-Cup sales, which may be discouraging for recent partnerships it made with Starbucks (Nasdaq: SBUX ) , and existing K-Cup partners such as Dunkin' Brands (Nasdaq: DNKN ) and Caribou Coffee (Nasdaq: CBOU ) . Many people, both inside and outside these companies, saw K-Cups as huge potential revenue streams and may have generously padded expectations about future sales based on this notion. To see K-Cup sales slipping isn't very comforting.

It is important to note that net income per share, at $0.47, was still more than double last year's figure, so the company is growing, but I believe expectations were overshot for so long that they are just now coming back to Earth.

Foolish final thoughts
This company is a falling knife, so don't try catching it anytime soon. Green Mountain may have a bright future, but with so many question marks and a stock price that's acting like it has an anchor attached to it, I'd stay away and let the dust settle.

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Austin Smith owns no shares of the companies mentioned here, but consistently spills their products on his shirts. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters and Starbucks and creating a lurking gator position in Green Mountain Coffee Roasters. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (10)

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Report this Comment On November 10, 2011, at 1:23 AM, TurbulentTime wrote:

Totally agreed. Actually, I also am selling 500 of my 2000 shares of Starbucks, which I bought in May 2009. I suspect that the entire coffee sector is kind of overshot as of now. I do realize that Starbucks seems to have a more established market for its products versus Green Mountain's K-cup, which is comparatively newer. However, with uncertainty still linger in Euro Zone, and that some retail company stocks seem to me over-valued, I like to take some bets off the table for a while. That could turn out to be great when I can spend the proceeds of my 500 shares of Starbucks sold and buy some of Green Mountain 'after' the dust will be settled.
Report this Comment On November 10, 2011, at 8:44 AM, TMFBWItime wrote:

@TurbulentTime
Thanks for your comment,and good choice on Starbucks! As you can see in some of my other pieces, I believe they are the best positioned of the coffee stocks.
I think you may be right about the cofee sector being a bit over-zealous lately, but it's also important to remember the international plans these companies, Starbucks in particular, have in place.
Best of luck spending those Starbucks proceeds going forward! Fool on!
Report this Comment On November 10, 2011, at 12:07 PM, ARL1988 wrote:

Enjoyed the insight.
Since the Madoff-scandal there is no excuse for 'accounting shenanigans' in this day and age, period. These will only continue to hurt GMCR, until they can straighten everything out internally. Secondly, the 'K-cup' phenomenon is dissolving in a hurry; further weakening GMCR's financial leverage moving forward. GMCR thought they had issues reaching lofty sales/revenue goals? Just wait until those patents expire..
Look forward to reading more of your work Austin!
Report this Comment On November 10, 2011, at 6:23 PM, TMFBWItime wrote:

@ARL1988,
I think you're absolutely correct, the patent expiration will be a nail in the Keurig's coffin. They have some favorable contracts which will ensure some revenue, but the design is so easy to mimic that their economic moat will quickly erode.
Speaking of New England companies, what I want to know is when Lahout's IPO will be. They've got a crazy loyal fan base, the best real estate, and they've been doing it longer than anyone else. I'm watching the boards to see when I can pick up a piece of these guys.
Fool on!

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