Every time I think about today's quarterly tidings from Green Mountain Coffee Roasters (Nasdaq: GMCR), and then look at its surging stock price, it's hard for me to suppress one single, blaring thought.
What?!
Seriously, there's little to cheer about in Green Mountain's quarterly report, yet the last time I checked today, the stock was up 25%. Perhaps this can be explained by misguided euphoria or a short squeeze -- or both.
Green Mountain reported a 30% increase in third-quarter profit to $73.3 million, or $0.46 per share, plus a 21% increase in net sales. Green Mountain's earnings exceeded expectations a bit, while revenue came in weaker than expected. Furthermore, there are a few alarming things to consider here.
Never mind the top of the press release, where the company "refines" its 2012 outlook -- i.e., cuts it big-time. Somebody's missing the memo. There's a reason why the stock originally fell 12% last night in after-hours trading. Trading was even halted for a few minutes.
Most significantly, Green Mountain's 60% increase in inventories greatly outstripped its sales-growth increase. The excuse that it's stocking up for the upcoming holidays simply doesn't ring true to me, given the sluggish economy, skittish consumers, ugly 2012 outlook, and the competitive aspects I'll mention below.
Inventory surges are a red flag for stocks. Remember Crocs' (Nasdaq: CROX) fall from grace in 2008? An unsightly surge in inventories heralded trying times for the shoe company.
Maybe coffee and shoes don't much anything in common except that they target consumers, but these two companies have similar histories: They both were once high-growth stocks and investor darlings with insane multiples. (Years later, Crocs finally looks like a reasonable stock idea.)
Even more dangerously, Green Mountain is still under investigation by the Securities & Exchange Commission for its accounting practices, and allegations by skeptics like hedge fund manager David Einhorn and convicted-felon-turned-anti-fraud-crusader Sam E. Antar that the company has been playing fast and loose with its numbers should be enough to scare most investors off.
Last but not least, key K-Cup patents expire this fall, and important partner companies like Safeway (NYSE: SWY) and Kroger (NYSE: KR) recently said they plan to make their own branded single-serve coffee offerings -- for Green Mountain's Keurig and other single-serve brewers. That spells real potential trouble for the razor-and-blade model Green Mountain's been using for its Keurigs and K-Cups.
Want to play it safe? Stick with Starbucks (Nasdaq: SBUX), which doesn't have nearly the same amount of sketchiness surrounding its stock. Although Green Mountain trades at eight times forward earnings -- far lower than Starbucks' forward P/E of 20 -- it is no value stock in my book. Investors who go for it now are pouring themselves a big cup of risk, and they might be in for a scalding spill.
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