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Green Mountain: Cheap for All the Wrong Reasons


Green Mountain Coffee is down huge on a significant revenue miss.

Let's give some kudos to hedge fund manager David Einhorn -- his very ugly and very public campaign against Green Mountain Coffee Roasters (GMCR) culminated in a massive gain for his investors as the former momentum favorite crashed and burned.

Since I knocked his analysis of Best Buy (BBY) (see Is Einhorn Right on Yahoo and Best Buy?), I'm more than obligated to give him his due today.

Green Mountain, which traded as high as $115.98 in September, closed at $67.02 yesterday. Much of the decline was the result of contagion introduced by Einhorn's investment report on Green Mountain, which was released in mid-October when the stock was trading in the low $90s.

Wall Street analysts aggressively defended Green Mountain when Einhorn released his report, but they're eating crow today.

Green Mountain dropped its fiscal fourth-quarter earnings report after the close yesterday, and the stock has since collapsed below $50, a level it hasn't seen since March.

Let's look at the details:
  • Earnings came in at $0.47 a share, beating consensus estimates by a penny
  • Revenues rose 91% to $712 million, missing Wall Street's expectations by about 6%
  • Green Mountain forecasts first-quarter earnings of $0.35 to $0.40 a share, which is ahead of the $0.33 consensus
  • First-quarter revenue guidance is also ahead of expectations at $1.06 billion to $1.09 billion
  • Fiscal 2012 earnings guidance is slightly above consensus at $2.55 to $2.65 a share
  • Fiscal 2012 revenue guidance is just a bit light at $4.24 million to $4.37 billion
  • Inventories rose year-over-year by 156%
Yesterday afternoon, I noted in the Buzz & Banter (click here for a Free Two-Week Trial!) that "I wouldn't be surprised to see the stock trade below $50 or above $85." I had no directional view on Green Mountain, but I was pretty sure the stock was set for a wild move, similar to what we saw with Netflix (NFLX) in late October. (See Netflix: Double-Costanza Time After the Most Predictable Collapse of 2011.)

Unfortunately, I chickened out and failed to make any trades that would allow me to capitalize on such a view, but let's look at how Green Mountain went from $67 to under $50 in two shakes of a lamb's tail.

First of all, let's remember that even with its massive decline down to the $67 level, Green Mountain was still pretty expensive heading into yesterday's report.

The stock was trading at 41 times this year's and 26 times next year's consensus earnings estimates. That's cheap compared to other momentum favorites like (CRM) and Chipotle (CMG), but pricey nonetheless.

Secondly, Einhorn's bear case turned Green Mountain into the battleground stock of the year by getting folks seriously worried about Green Mountain's accounting practices and the sustainability of its momentum. And obviously, some folks didn't buy that bear case and bet on a big rally on strong earnings numbers.

With emotions running strong on both sides, it was simply a recipe for extreme volatility.

So when traders saw revenues fall short of expectations by $49 million and saw those inventories swelling faster than sales, they looked past the strong guidance and threw in the towel. Conversely, had Green Mountain's revenues come in even in-line, the stock would have skyrocketed and destroyed the shorts.

As of this morning, Green Mountain is a cheap stock, no question about it, but I'm steering clear.

In a situation like this, I toss out all valuation metrics because animal spirits trump fundamentals.

Einhorn's doom-and-gloom bear case isn't necessarily coming true. Green Mountain may very well have just hit a one-time stumble, and I'm probably more bullish on K-Cups than most of the analysts who have been pushing the stock. Who knows? Maybe the company earnings will be $10 a share five years from now.

But ultimately, what happens in the long term doesn't matter because confidence in Green Mountain is being decimated today, and that means it's Costanza time (read: shrinkage) for the earnings multiple.

Twitter: @MichaelComeau

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No positions in stocks mentioned.
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