“This price war is just getting started,” David Einhorn told investors at the Value Investing Congress this morning, toward the end of his second annual Green Mountain Coffee Roasters bash-a-thon. As he did last year at the same conference, Einhorn questioned the company’s capital expenditure, cast doubt on their accounting practices and remarked on an unfavorable competitive landscape of increased, low-priced competition.
Einhorn began by highlighting Green Mountain management’s response to his 2011 presentation, noting that GMCR CEO Larry Blanford responded to concerns by saying that a further investigation had been performed – “we take the recent allegations quite seriously” – and nothing had been found, a mere 23 days following Einhorn’s initial presentation. The response, said Einhorn, indicated a company intent on giving lip-service to change rather than actually investigating and reforming.
Einhorn used Starbucks’ recently-released Verismo machine as an example of Green Mountain’s hubris, pairing contemporaneous quotes from the two companies' CEOs.
“I think their single-serve system is first and foremost an espresso single-serve system,” said GMCR CEO Larry Blanford on September 19.
Just a day later, Starbucks’ billionaire CEO Howard Schultz told the New York Times, “The machine will be the first machine on the market, unlike Nespresso or the Keurig machine, to make both brewed coffee and espresso.”
Regarding Starbuck’s existing contract with GMCR – an opaque contract only described as “multi-year” by the two companies – Einhorn painted a picture of a rocky relationship. He paired another Schultz’s quote, “I think for the time being we are committed to the partnership,” with a photo of a young Bill and Hillary Clinton.
Einhorn highlighted increased competition in the single-serve coffee market as a threat to Green Mountain Coffee Roasters, which does not have the low-cost capacity of new competitors. Because it had patents on the K-cup’s intellectual property, Green Mountain was able to price itself as a monopoly.
“We think GMCR is incredibly exposed because it has a high cost structure,” said Einhorn. “There is still significant downside in the stock.”
Einhorn opened with anecdotes about his recent market-moving proclamations – most of which weren’t proclamations at all. He implored investors to do their homework rather than blindly following lead investors. Analysts and investors using Einhorn and other top investors as surrogate researchers, said Einhorn, “is like replacement referees deciding ‘Touchdown Seahawks!’ "
In particular, he noted that during last year’s Green Mountain Coffee Roasters presentation, investors seemed more swayed by his title slide than his supporting research. “Last year when I spoke at this conference, I’m told the stock started dropping before I finished clearing my throat,” he said. “GMRC lost more in 90 seconds than it did in the rest of the day.”
Today, investors are perhaps following Einhorn’s advice. After an immediate drop of more than 3% just seconds after Einhorn launched into his GMCR thesis, the stock quickly rebounded. Against all odds, GMCR is currently up 1.3% on the day, although it remains down over 25% since it’s recent high mark in mid-September.
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