Checking for Revenue Tricks at Green Mountain Coffee Roasters

There's no foolproof way to know the future for Green Mountain Coffee Roasters (Nasdaq: GMCR  ) or any other company. However, certain clues may help you see potential stumbles before they happen -- and before your stock craters as a result. Rest assured: Even if you're not monitoring these metrics, short-sellers are.

A cloudy crystal ball
I often use accounts receivable (AR) and days sales outstanding (DSO) to judge a company's current health and future prospects. It's an important step in separating the pretenders from the market's best stocks. Alone, AR -- the amount of money owed the company -- and DSO -- days worth of sales owed to the company -- don't tell you much. However, by considering the trends in AR and DSO, you can sometimes get a window onto the future.

Sometimes, problems with AR or DSO simply indicate a change in the business (like an acquisition), or lax collections. However, AR that grows more quickly than revenue, or ballooning DSO, can also suggest a desperate company that's trying to boost sales by giving its customers overly generous payment terms. Alternately, it can indicate that the company sprinted to book a load of sales at the end of the quarter, like used-car dealers on the 29th of the month. (Sometimes, companies do both.)

Why might an upstanding firm like Green Mountain do this? For the same reason any other company might: to make the numbers. Investors don't like revenue shortfalls, and employees don't like reporting them to their superiors.

Is Green Mountain sending any potential warning signs? Take a look at the chart below, which plots revenue growth against AR growth, and DSO:

Source: Capital IQ, a division of Standard & Poor's. Data is current as of last fully reported fiscal quarter. FQ = fiscal quarter.

Source: Capital IQ, a division of Standard & Poor's. Data is current as of last fully reported fiscal quarter. FQ = fiscal quarter.

The standard way to calculate DSO uses average accounts receivable. I prefer to look at end-of-quarter (EOQ) receivables, but I've plotted both above.

Watching the trends
When that red line (AR growth) crosses above the green line (revenue growth), I know I need to consult the filings. Similarly, a spike in the blue bars (DSO) indicates a trend worth worrying about. As another reality check, it's reasonable to consider what a normal DSO figure might look like in this space.

Company

LFQ Revenue

DSO

 Green Mountain Coffee Roasters $312 38
 ConAgra Foods (NYSE: CAG  ) $2,818 27
 Farmer Brothers (Nasdaq: FARM  ) $107 33
 Coca-Cola (NYSE: KO  ) $8,426 42

Source: Capital IQ, a division of Standard & Poor's. DSO calculated from average AR. Data is current as of last fully reported fiscal quarter. LFQ = last fiscal quarter. Dollar figures in millions.

Differences in business models can generate variations in DSO, so don't consider this the final word -- just a way to add some context to the numbers. But let's get back to our original question: Will Green Mountain miss its numbers in the next quarter or two?

The numbers don't paint a clear picture. For the last fully reported fiscal quarter, Green Mountain's year-over-year revenue grew 63.5%, and its AR grew 88.1%. That's a yellow flag. End-of-quarter DSO increased 15% over the prior-year quarter. It was up 4.8% versus the prior quarter. That demands a good explanation. Still, I'm no fortune-teller, and these are just numbers. Investors putting their money on the line always need to dig into the filings for the root causes and draw their own conclusions.

What now?
I use this kind of analysis to figure out which investments I need to watch more closely as I hunt the market's best returns. However, some investors actively seek out companies on the wrong side of AR trends in order to sell them short, profiting when they eventually fall. Which way would you play this one? Let us know in the comments below.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Coca-Cola is a Motley Fool Inside Value pick. Green Mountain Coffee Roasters is a Motley Fool Rule Breakers selection. Coca-Cola is a Motley Fool Income Investor pick. The Fool owns shares of Coca-Cola. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 20, 2010, at 4:22 PM, refriedbean wrote:

    Sales drives everything and they've got that. Everything else can be fixed. How come there are never any positive articles on Green Mountain? Just a hunch, but I think they must be doing something right.

  • Report this Comment On October 20, 2010, at 4:40 PM, colin890808 wrote:

    Good article!!! If we also bring that their per shares earnings aren't any better than in 2008 and 2009, that they loose their K-Cup patent (where they makes their margin) by 2012-2017, and they already have some private label competition in the single serve industry, it makes this stock worth to short!!!

  • Report this Comment On October 20, 2010, at 5:08 PM, reggidmalc wrote:

    Checking For Writing Tricks at Motley Fool. When Seth posts a poorly supported innuendo filled piece one has to wonder if he has succumbed to the desperate writer's trick of stuffing the article with misleading data and then drawing unsupported conclusions. Comparing GMCR to KO is like comparing a rocket to a lumbering airplane. One is small and in parabolic growth mode; the other lumbering up steadily but slowly. GMCR's disruptive single serve coffee business is nothing like Coca Cola except that they are both beverages. Nice try, Seth. Don't leave your night job.

  • Report this Comment On October 20, 2010, at 5:09 PM, Frogger21 wrote:

    Worth noting also, which may explain the changes noted above, is that Green Mountain changed (outsourced) some of their distribution this year. Depending on the point at which revenue is recognized (upon shipment to the distributor or upon shipment from the distributor to customers), would certainly have an effect on DSO. Such changes rarely go as smoothly as planned and may well cause some DSO hiccups.

  • Report this Comment On October 20, 2010, at 6:23 PM, BenGrahamMan wrote:

    Nice article and graphs.

    There is a distinct possibility that the A/R and Sales situation is a non-event. There is an inventory build as well. Most bulls expect there will be a sell through and all will be good. A few quarters will let the readers of financial statements if the A/R was being reported too aggressively.

    We know that revenue processed by MBlock amounted to $282.5 million and $88.6 million and receivables amounted to $46.3 million and $19.6 million at September 26, 2009 and September 27, 2008, respectively. Receivables from this company were approximately 51% of GMCR consolidated accounts receivable balance at September 26, 2009.

    We know that SEC is investigating GMCR. GMCR claims that Revenue Recognition and M Block and Sons are what SEC is looking into. I imagine we will know the results of the investigation at some point over the next few months.

    Here are some metrics I put together in regards to GMCR:

    http://www.rbcpa.com/companies/GMCR_Various_Metrics.pdf

  • Report this Comment On October 22, 2010, at 4:04 PM, ugopig wrote:
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