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Did Green Mountain Vanquish Einhorn? Not So Fast

Dee Gill

On the surface, it sure looks like Green Mountain Coffee Roasters (GMCR) is winning the battle against David Einhorn, a short seller who bludgeoned its share price with a damning slide presentation in 2011. Profits are up, its K-Cup sales are booming, and a long line of new machines and new brews are in the works. The share price hasn’t fully recovered, but it’s up 93% this year alone, as seen in a stock chart.

GMCR Chart

NASDAQ:GMCR data by YCharts

But on closer inspection, the data that has made Green Mountain bulls so happy lately still reveals ammunition for short sellers, who have shorted about 20% of shares outstanding now. What follows is a look at Green Mountain from both glass-half-full and half-empty perspectives.

Green Mountain’s profits have more than doubled since Einhorn’s presentation, a particular coup considering the obstacles to profit growth he uncovered.

GMCR Net Income TTM Chart

GMCR Net Income TTM data by YCharts

Turns out the obstacles – competition, mainly -- are still there. But Einhorn’s rant happened to coincide with the steepest decline in coffee prices in a decade, and that’s been a big help to Green Mountain profits. Analysts estimate that better coffee prices alone have added about 370 basis points to gross profit margins.

Coffee Arabica Price Chart

Coffee Arabica Price data by YCharts

Green Mountain’s revenues were up 14% in the second fiscal quarter and 11% in the latest (third) quarter, but those gains were supposed to be higher. The company missed revenue projections both times.

GMCR Revenue TTM Chart

GMCR Revenue TTM data by YCharts

A key reason for those misses were flat shipments of the Keurig brewing systems. Pod growth slowed down last quarter too, but still gained 21%. But Green Mountain bulls believe the company can keep earnings growing in the high-teens over several years by adding new brewers and brews. The company showed off an innovation pipeline to analysts earlier this month that included more machines, including some more suited for commercial buyers, like convenience stores, as well as a broader array of beverages, like soups and sodas.

However, several other companies now have the same idea. Treehouse Foods (THS), an unexpected disrupter, has aggressively and successfully recruited grocers who want to put store brand coffees and teas into pods. Mother Parkers Tea & Coffee, a private Canadian company, began making K-Cup knock-offs in August 2012 and had produced 25 million six months later. Unlicensed competitors are believed to have cornered roughly 11% of the pod market, mainly just in the 12 months since Green Mountain’s key K-Cup patents expired. Suddenly, the companies that once had to pay Green Mountain to put their beverages in pods now have a choice.

This new influx of competition makes valuing a Green Mountain share particularly tricky. The analyst community is uncertain of how many K-Cups Green Mountain is selling, as independent research has been limited. (Green Mountain stopped giving out that data in 2010.) It’s too early to know how fast and how much market share the newcomers can gain, or how this competition will affect Green Mountain profits. While Green Mountain says it expects to win over some of those knock-off customers, it is unclear what the company will have to sacrifice to get them.

For the record, Green Mountain shares trade at 24 times forward earnings, a price to earnings growth ratio, or PEG, of about 2.2. That’s not cheap, but not particularly exorbitant for a growing market leader. Keep in mind, however, that those valuations are based on projections that are particularly hard to make at this turning point in the industry. For now, there’s something for everyone to see in Green Mountain.

GMCR Forward PE Ratio Chart

GMCR Forward PE Ratio data by YCharts

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.

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