CAPS Rating (out of 5)
|Dynegy (NYSE: DYN )||
|Green Mountain coffee Roasters (Nasdaq: GMCR )||
Source: Motley Fool CAPS.
Although well off its highs, the Dow ended up in positive territory on Friday, rising 14 points -- not bad considering what a sovereign default portends. So stocks that went down by large percentages anyway are pretty big deals.
I don't feel the power
Late last year, energy producer Dynegy filed for bankruptcy protection with a surprising plan to protect equity investors ahead of bondholders. It was unusual in that bondholders typically stand first in line to be made whole while stockholders get nothing. The bankruptcy filing was also unique because Dynegy sought protection for just one of its units, Dynegy Holdings, which it had transferred rich assets out of earlier this year.
Bondholders, being the shrewd investors they are, weren't standing for it. Public Service Enterprise Group (NYSE: PEG ) and other creditors sued Dynegy, saying that since the energy producer transferred its coal and natural gas assets out of bondholders' reach, equity investors were protected by the continuing operations, and bankruptcy was virtually guaranteed. They argued Dynegy engineered this set of circumstances solely to escape from expensive leases that the bondholders hold on its power plants, and last week, the bankruptcy court's examiner said Dynegy did just that. Dynegy's asset shuffle "was an actual fraudulent transfer."
Predictably, Dynegy's shares were sent tumbling. Highly rated CAPS All-Star tallenuk thinks the market overreacted, and while perhaps true, the finding injects a large amount of risk, as it's uncertain how the energy producer unwinds this in bankruptcy courts.
Investors who believed in Green Mountain Coffee Roasters' ability to navigate patent expiry and increased competition discovered it was like driving with a cup of coffee on the dashboard: possible, but likely to result in a scalding. And so they were on Friday, when Starbucks (Nasdaq: SBUX ) announced it would be introducing its own single-cup brew machine.
Part of the investment thesis was since Starbucks, Dunkin Brands (Nasdaq: DNKN ) , and others had inked marketing deals with Green Mountain for its K-Cups, the likelihood of a challenge from that end was nil. Admittedly as much as I saw the coffee brewer in an untenable position -- I had rated it to underperform the broad indexes on CAPS -- I expected a concentrated attack at the K-Cup level since patents on them were expiring later this year. What the Starbucks announcement proves is that the entire business model of Green Mountain is threatened.
The single-cup brew machines will soon be commoditized while the cups themselves will be a dime a dozen. Add in some penetrating questions about its accounting, and Green Mountain looks more like what's left after a mountain top removal mining operation.
Although I'll be maintaining my underperform rating, fluffheadsr hits on a point that may at least forestall for a while the worst impact it can expect to absorb:
panic sale.. not much to worry about here.. Kuerig low pressure machine has its market..
Starbucks' machine is a high-pressure machine, more akin to Nestle's Nespresso espresso maker than Green Mountain's low-pressure coffee unit. But it doesn't take much imagination to see a migration to that market, too.
Add the embattled java slinger to the Fool's free portfolio tracker to keep apprised of what's brewing, and tell us on the Green Mountain Coffee Roasters CAPS page your opinion on how it addresses these credible threats.
Ready for a resurrection
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