Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) has suffered a second blow from hedge fund star David Einhorn today. This time last year, Einhorn delivered a similar statement, questioning the fundamentals of GMCR’s business. Since that delivery, the firm’s stock has fallen by more than 75%.
At the 8th Annual Value Investing Conference in New York, Einhorn delivered a presentation centering on investment ideas for four firms, two short and two long. Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) was unlucky enough, for a second year running, to be included as a short.Our live coverage of the entire presentation is here.
Einhorn’s skepticism of the firm’s accounting practices, as well as their robustness when faced with competition, is well know,. After questioning procedures at the company last year, an internal investigation was set up and completed in twenty three days. No evidence was found that Einhorn’s assertions had any basis.
Investors listened to the assertions, however, that fact was made clear by the subsequent drop in the firm’s share price. Today’s presentation concentrated less assertions that the firm is involved in nefarious business transactions. This year Einhorn opted for a robust assassination of the company’s business fundamentals.
Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) has seen its stock rise in the last decade, due to the popularity of Keurig coffee machines, manufactured and sold by its wholly owned subsidiary Keurig.
In what Einhorn memorably described as a classic “Razor/Razor Blade” business model, the company garnered most of its profits from sales of the coffee cups, rather than sales of the machines. Key patents for the coffee cups design expired last month. That means the firm will now face huge competition from low cost alternatives compatible with its machines. Accordingly, the firm, according to Einhorn’s 2011 presentation, is no longer a tech business. It is now a manufacturing business.
Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) is also vulnerable to competition from firms that have supplied its revenues in the past.Increased competition, along with expiration of these contracts, might hit the firm from two sides at once, according to Einhorn.
Exemplary of this is the company’s relationship with Starbucks Corporation (NASDAQ:SBUX). That firm has a deal with GMCR, whereby it supplies its own coffee blends for packaging and sale in K-cup format, compatible with Keurig coffee makers.
Starbucks Corporation (NASDAQ:SBUX) recently released its own coffee machine, making both full cups and espresso, directly competing with GMCR. The deal between the firms is not transparent, and has only been described as multi-year, but as it is clearly less beneficial to Starbucks, and now it seems in that company’s interests to end it, or allow it to expire.
Green Mountain is attempting to appease investor worries by launching a new range of coffee machines branded Vue. These machines, touted as more advanced than their Keurig counterparts, take advantage of a new cup system, securing high margin sales if the product takes off.
Einhorn does not see a pleasant future for Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR), but investors were not so easily swayed by his arguments this year, as they were in 2011.
GMCR shares are up over 2% at the time of writing. During Einhorn’s presentation last year, the company entered a slide from which it has yet to recover. Part of this may be Einhorn’s insistence that investors do not follow him blindly, but rather do their own research.
The coming days and weeks will reveal how investors respond to Einhorn’s renewed attack on the company. The investor’s presentation, which we should have in the coming hours, will provide the entertainment necessary to get through the wait.