David Einhorn photoNote to readers: I am writing all these posts very informally. I have found that readers like this the best, and it enables me to take the most notes possible and get them up in real time. I will be updating the presentations in real time, and tweeting, so make sure to check back frequently or on TwitterFacebook or Feedburner. Also you can check out this website announcement Value Investing Congress Website Announcement.

All notes are the speaker’s own statements, except for my own notes in the brackets.

David Einhorn is president and CEO of Greenlight Capital, Inc. (a value-oriented investment advisor), believes an investment approach emphasizing intrinsic value will achieve consistent absolute investment returns and safeguard capital regardless of market conditions. Greenlight has produced 22% annual returns since inception in 1996, and today has aum of over $10 billion. David Einhorn is also the author of a fantastic book about his short of Allied Capital and MBIA, Fooling Some of the People All of the Time, A Long Short (and Now Complete) Story (highly recommended, see my book review- here ). Prior to founding Greenlight, he was at SC Fundamental. Before that, he was at DLJ.

Einhorn spoke very quickly. All mistakes are my own.

I (David Einhorn) have a short position in this company:

GreenMountain coffee. The presentation is 110  pages.

GMCR grew nicely in the 90s as specialty coffee.

In 1990s, GMCR bought Keurig. This became the biggest driver. It licensed out Keurig’s K-cups to other businesses, which drove huge growth.

GMCR is projected to show continued growth in EPS. The growth has been as a result mostly of acqusitions.

It is trading at 57x EPS earnings.

The stock was up 215% in 2009, and 180% this year.

The bulls believe GMCR is still in the early innings. There are 64 million households who drink coffee twice a day.

GMCR will have growth in households. GMCR will also have margin expansion.

One bull sees GMC earnings $9 a share soon. If they can get 1/3 of the 64 million households to drink two K-cups a day.

GMCR says that it is a technology company. Jim Cramer called the stock an ETF.

They were called the ipod of coffee.

The company has a record of reduced transparency.

Management has been removing disclosure about coffee, k-cups and brewers over the years. The management cited quite period before earnings and refused to talk.

I believe that market is smaller, and GMCR has penetrated most of it.

Keurig is very expensive. They start at $80 and go up to $250.

Folgers, Maxwell House, Dunkin Donuts and Starbucks all have cheaper coffee.

I think the going forward opportunity is much smaller than the bulls. Brewers on average last three years. GMCR shows a small number of installed bases.

Sales growth from retailers has slowed over the past few years. K-cup attachment rate is going down every year.

GMCR stopped disclosing K-cup sales.

Starbucks announced deal, where SBUX will sell K-cups in stores. The deal is non exclusive and is multi-year. The agreement doesnt apply to GMCR’s next generation deal.

There are two aspects of the deal; licensing and contract manufacturing.

We believe there is .22 cents split between SBUX and GMCR for the deal.

In reality SBUX should make 2/3 of the profit. SBUX can cannobalize K-cups to higher margin customers.

Quality businesses should generate a lot of cash. However cumulative FCF has been negative for the past five years. The company is using a lot of cash for acquisitions.

Bulls expect $4 of earnings in 2013 with ROC of 16%. This ROC does not justify such a high multiple.


GMCR depends on high margins from K-cups, however, the patents on K-cups is ending in 2012. Management says that patents can be extended until 2012. However GMCR’s plan to extended patents will not be successful, and even if they are, competitors can still produce similar products, which are compatible with Keurig.

All the improvements on the K-cups needs to do more to get a patent. It needs a marginal difference to show a difference. Even if they win a patent , they need to convince the consumer that this is a better cup, this is doubtful.

GMCR is now looking to replace the brewer platform. But this seems unlikely to help the problem.

Why would a consumer switch from open platform to a closed platform and be stuck with GMCR’s high prices.

GMCR has for years been trying to extended the patent, by buying out competitors, and improving on the patent.

GMCR acquired Diedrich, which now has a negative book value. GMCR has revalued the acqusition on its book.

GMCR did the same with the Van Houtte transaction.

GMCR was buying companies to try to eliminate competition to the K-cups.

GMCR’s big name partnerships provide a false sense of protection. These partnerships tend to be low margin.

We have spoken to major retails who all said that they want private label K-cups.

Any big company like Kraft, Nestle and others can make private label K-cups. Nestle has a high end product.

They also have some nice brewing machines.

If you adjust all these assumptions and take the bulls case of $9 a share brings the potential EPS to $3.50.

GMCR tripled capex in 2011, and plans to double next year. Capex is currently at 130% of net income.

We cant begin to imagine what they plan to spend on. Capex is growing so much quicker than business, and management has been vague on the topic.

Van Houtte added $100m to revenue, and operating expenses fell a lot. The CFO refused to disclosure it. In the June 2011 Q, operating expenses were placed at $38million.

June quarter usually has slower sales do to hot weather. K-cup sales increased drastically, however, K-cups sales are easy to predict within a few percent. It went up 27% and the company even admitted to being surprised by this huge increase in K-cup sales.

SEC launched a recent investigation into GMCR. GMCR has announced an investigation but did little to solve accounting problems.

GMCR might be engaged in shenanigans with MBlock. They used sub-standard IT systems. The companies refuse to increase their technology standards.

They use many college students for accounting, many people suspect they were fired for asking the wrong question.

Bonuses were based on production rather than sales, leading to over-production.

One trucker said that he would pick up inventory unload it, and pick it up later to deliver again 10 doors down.

MBlock received truckloads of expired coffee from GMCR.

In summary:

The market is small. The attachment rates are falling. Earnings should be earning closer to $3.50 ignoring the shenanigans.

A lot of surprise with recent accounting and possible shenanigans. Insiders sold stock recently.

Disclosure is reduced and changing to try to confuse analysts.

Capex is unexplained.

Partnership with MBlock is questionable.

The auditors, PcW has not given an unqualified opinion.

Given the warning signs and insider selling, and lack of FCF the stock should be avoided.


MBlock and the relationship with GMCR is unclear.

There is no doubt that they are selling a lot of coffee, but we see lots of K-cups throughout the country close to expiration date.

Will SEC do anything? We have not talked to the SEC. The SEC has already been there for over a year, there is hope that they might look into it. It would be helpful if there were suponaes instead of interviews like we did.

Sprint? It is very complicated, trying to

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