SunTrust Analyst Calls Out Einhorn On His Shoddy Green Mountain Math

Don’t grind up your shares of Green Mountain Coffee Roasters quite yet. Just four days after David Einhorn dressed down the company – and sent its stock price plunging – SunTrust analyst William Chappell is standing up for the roaster, naming it his top pick. In particular, Chappell takes issue with Einhorn’s use of outdated research, unlikely statistical extrapolation and incorrect calculations. “After going through his presentation, I realized that he used my research as the bull case to dissect, so I felt I should probably rebut that,” Chappell told me. “On the math side there’s a double count where he says there are only 22 cents of profit per K-Cup for Starbucks and Green Mountain to split,” says Chappell, referring to Einhorn’s thesis that licensing deals with Starbucks and other coffee producers will be less profitable on a per-K-Cup basis than Green Mountain’s current K-Cups. “But he’s assuming both companies spend 15 cents on packaging, when in fact, Starbucks is paying Green Mountain 15+ cents for packaging.” Chappell also finds fault in Einhorn’s assessment of the expansion of private label coffee in retail environments. “Private label coffee has been 10% of coffee sold at retail for the past ten years, with a standard deviation of 1%,” says Chappell. “He’s assuming it goes to 20% -- that means a 10 standard deviation move, which is statistically impossible over the next 5 years.” Finally, and perhaps most critically, Chappell says Einhorn’s analysis of Green Mountain Coffee Roasters’ inventory management and manufacturing relationship with MBlock is based on old, outdated information. Einhorn’s presentation cited quotes from former employees revealing flawed – and potentially intentionally misleading – warehousing practices. “He mainly talks about accounting questions in 2011, but he refers to a deposition for an employee taken in December of 2009. That’s fine, except that they’ve restated their numbers after doing a deep dive this time last year. So you’re kind of getting double jeopardy if you’re blaming them for something they’ve already fixed,” says Chappell. “If you look, there’s no quote, there’s no MBlock employee talking about 2010 or 2011. It all has to do with 2009, of which they’ve since restated their numbers and scrubbed their numbers.” “It’s not new field research. It’s all taken from a class action lawsuit that has publicly been out there for six months. You’d have to ask him why he didn’t find anything new this year.” Chappell isn’t saying that Einhorn’s research is false – just out of date. “I do think there were probably some growing pains, especially around holiday seasons [before 2009] when they were in hyper growth mode,” he says. He’s also not saying that his bullish projection of $9 earnings per share will come to fruition next year. “That wasn’t the intent, originally,” says Chappell. “It was that over the next few years they’ll have that kind of earnings power.” Still, making Chappell is confident that Green Mountain Coffee Roasters is a strong buy, and SunTrust has set a target price of $120 for the stock, which is trading just below $68. In fact, he sees the stock’s 14 point drop this week as even more reason to get in. “That helps, definitely,” he says. “When it moves this much in a week, that makes it even easier to make it a top pick.” [wikinvestchart exchange="NASDAQ" ticker="GMCR" range="recent" rolling="1 month" height="245" width="390" live_quote="true" annotations="false"] Previously: Switching To Decaf: Einhorn Bashes Green Mountain Coffee Roasters See Einhorn's presentation on Green Mountain Coffee Roasters below: [scribd id=69439536 key=key-86erii2z6me5n51wwk5 mode=list] Also Read