When Wall Street Hotshots Are Wrong, Your K-Cup Company Tumbles

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Green Mountain Coffee Roasters, David EinhornWords can move the market, especially when the person mouthing those words is legendary hedge fund manager David Einhorn.

Shares of Green Mountain Coffee Roasters (GMCR) tumbled 10% after Einhorn revealed that he was betting against the company. Patent expirations, questionable accounting practices, and a lofty valuation have led the hedge fund manager to short the company behind Keurig single-cup coffee brewers and the K-Cup refills that make them run.

Einhorn is the one who famously bet against Lehman Brothers shortly before the investment banker's collapse a few years ago, so when he's a naysayer people listen.

Let's go over three reasons he may have sipped more than he can slurp here.

1. K-Cup patent concerns are overblown
It's true that two of Green Mountain's dozens of patents -- important ones covering the K-Cup portion packs -- expire next year. If the Vermont-based java heavy can't find a way to extend those patents, anyone would be able to market their own K-Cups -- though likely under generic names.

Green Mountain gets a few pennies for every licensed K-Cup sold, so it's easy to see why this is problematic.

Thankfully, Green Mountain has been readying itself for this day. It has snapped up the regional makers of its most popular K-Cups, assuring itself of continued profitability without the licensing royalties. Green Mountain is also working on a new espresso-making system and an updated Keurig platform, and success with either of these new machines will create new patent gravy years.

2. Green Mountain's potential market is bigger than naysayers think
Green Mountain estimates that K-Cup brewing systems can be found in 8% to 10% of the homes in this country.

In its recent call it claims that 25% of the coffeemakers sold during this past holiday season were Keurig systems. In other words, the market is growing. Green Mountain is simply at the mercy of joe buffs replacing their makers.

We're not just talking about hot coffee and tea here. Green Mountain recently struck a deal with ConAgra (CAG) for Swiss Miss hot cocoa. It has also been promoting a new line of chilled K-Cup beverages. Brewing the coffees and teas into a cup of ice does the trick.

Where does it go from here? Green Mountain is exploring beverages with functional or wellness benefits. (Vitamin coffee, anyone?) In short, the market for one-off brews at substantially lower price points than barista-poured coffees is just getting started.

3. The company's shares are selling for a reasonable price
Analysts see Green Mountain trading at 31 times this new fiscal year's earnings and 21 times next fiscal year's projected profitability. These valuations may seem to be as rich as a freshly brewed Keurig coffee, but keep in mind that Green Mountain is growing considerably faster. Net sales grew 127% in its latest quarter, and earnings grew at an even headier clip.

Market darling Starbucks (SBUX) is mature and a relative slowpoke, yet it fetches a similar 19 times fiscal 2013's estimated earnings. Frappuccino fans justify Starbucks' market premium by pointing to international expansion, now that stateside growth has all but maxed out. What about Green Mountain's overseas potential?

Einhorn is an investing genius, but this bearish pick is near-sighted and flat-out wrong.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters and Starbucks. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters.



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22 Comments

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The Kid

what do you say now Rick?

November 10 2011 at 2:19 PM Report abuse rate up rate down Reply
Scott

I question the market size as more people are starting to see that there's a waste problem with k-cups. There isn't a way to recycle them, and the company knows that. See http://www.carbondiet.ca/green_advice/food/k-cup_coffee_maker_garbage_an_environmental_issue.html

October 21 2011 at 11:08 AM Report abuse rate up rate down Reply
phbotham

Used to love my Keurig and K-cups. However, in this economy, I had to take a sharp knife to my budget and K-cups had to go. Average price is 55 cents per cup when a traditional drip brew is 15-20 cents per cup. No brainer way was to pull out my old drip maker and save about $2 per day between me and my husband. Sorry Keurig

October 20 2011 at 4:41 PM Report abuse rate up rate down Reply
1 reply to phbotham's comment
daballofire

My custom blend drip brew is10 cents a cup, a fine brew and I don't have to pick it either :-)

October 20 2011 at 6:20 PM Report abuse rate up rate down Reply
daballofire

This the biggest pump and dump in the lkast 3 years, if you discount Netflix

October 20 2011 at 3:14 PM Report abuse rate up rate down Reply
tnwinc1956

Excerpt:

"But Einhorn's more serious accusations are on Green Mountain's way of accounting.

Citing field research with former employees of Green Mountain vendor, M. Block & Sons, Inc., he said Green Mountain and M. Block may "potentially engage in shenanigans to mislead auditors and inflate financials."

Quoting former M. Block employees, he said there was excess production and irregularities that showed up during external audits when trucks loaded with goods were driven off to "nowhere." A consignment of 500,000 brewers earmarked for televised home shopping company QVC was inventoried and processed, but "never shipped," Einhorn said his field research found.

He also said Green Mountain has been aggressive with its acquisition accounting when buying competitors, and that there are unexplained levels of capital spending. "

If true, the above strongly suggests intentional misrepresentations of material facts by management......which although the SEC does not care is Black's legal definition of fraud.

The coffee is beginning to smell like dead fish.

October 20 2011 at 1:48 PM Report abuse rate up rate down Reply
woodlanddance

Does anyone wonder what happens to the billion k-cups that go into the landfill each year?? While it is nice that GMCR has been trying to come up with a cup that will break down, a 'socially responsible' company would not be 'ok' with making a profit off from a BILLION k-cups sitting in the dump. As a 6th generation Vermonter, I object to them calling themselves by our state nickname. They are littering up our 'Green Mountains' (and everyone else's too...just for profit).

October 20 2011 at 12:33 PM Report abuse rate up rate down Reply
Anna

I'd sell my husband before giving up my K-cups!

October 19 2011 at 11:05 PM Report abuse rate up rate down Reply
nxston08

Who cares about how good the tea/coffee taste. The stock price is way too high. Einhorn is right. Short sellers will do well when the price falls to something more realistic.

October 19 2011 at 10:44 PM Report abuse rate up rate down Reply
rikydavid3

i have a k cup coffee maker an love it,best coffee ive ever had

October 19 2011 at 9:45 PM Report abuse +2 rate up rate down Reply
1 reply to rikydavid3's comment
rikydavid3

my coffee maker also has its ownk cup so i can ure other coffees,but super happy at 55 cents a cup

October 19 2011 at 9:48 PM Report abuse rate up rate down Reply
Karampasis

I love my Keurig! I make anywhere from 3- 5 cups a day (morning through night). I don't use the K-cups! Crazy priced gimmick that it is. I bought the filter and use any coffee I want...perfect!

October 19 2011 at 8:36 PM Report abuse rate up rate down Reply