Green Mountain Coffee: A Giddy Win for Short-Sellers

May 10, 2012

Ten years ago, smarting over my tech-stock losses, I should have bought shares of Green Mountain Coffee Roasters (GMCR). Of course, it was the manifest destiny of a Vermont-based outfit to go out and rock the coffee world, Starbucks’ (SBUX) hegemony be damned.

I mean, have you ever met a Vermont coffee snob? They’re hardy people who don impossibly weathered Patagonias held together with carabiners. Something about that tableau should have screamed capitalism to me. Green Mountain stock went from 89 cents in 2002 to a high of $116 last year, before collapsing last week when it announced its weakest sales growth in five years and a profit forecast that was less than Wall Street had expected.

Its board is in disarray while institutional investors cast doubt on its corporate governance. Starbucks, which competes with the company across its product lines, has never been as ubiquitous and well-capitalized as it is now. And Green Mountain’s founder and strategic locus has seen his clout diminished. Are the New England coffee insurgent’s best days behind it?

But put aside that last bit for a moment to take in this feel-good story. In 1981, founder Robert Stiller, who made money in the 1970s in the marijuana-rolling-paper business, bought the one-store operation and dived headlong into word-of-mouth and mail-order marketing. This is back when the best part of waking up was Folgers in your cup.

The tireless Stiller convinced small markets, cafes, private clubs, and even regional airlines to serve his brew. Green Mountain went public in 1993. By the middle of the last decade, the hugely successful brand was boosting its production capacity from 17 million pounds of coffee to 50 million. That was also when it consolidated its control of single-cup brewing machine outfit Keurig, whose tidy K-Cups now dominate kitchens and office pantries.

So flush was Green Mountain that in February 2011, Bloomberg calculated that the company was valued at 295 times its past-12-months cash flow, while the median multiple for all companies in the S&P MidCap 400, the stock gauge that includes Green Mountain, stood at 12.2 times. Short-sellers loved to hate the story—and last week they got what they wanted when the stock dropped by nearly half in one day on the bum May 2 earnings report. The stock is down 41 percent this year, and some 66 percent in the past 12 months.

And that would be that, save for the fact that Chairman Stiller, who was also chief executive officer until 2007, dumped 5 million shares to meet a margin requirement in violation of company trading policies. Which is why Stiller is now the ex-chairman of Green Mountain. In a May 8 statement, the company called the forced sales “disappointing” and beyond its control.

The affair “strains the credibility of the board,” Stifel Nicolaus (SF) analyst Mark Astrachan wrote in a client note. With Green Mountain suddenly looking rudderless, watch for the vindicated shorts, including David Einhorn and Whitney Tilson, to trumpet that criticism, while investment bankers megaphone how this perennial acquisition target–the margins on those K-Cups!—is a stock now trading at one-quarter of its peak.

2012-05-10T11:20:19+00:00 Categories: Coffee News|Tags: , , |0 Comments

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