Reuters: Global Markets: Green Mountain management losing credibility with Wall Street

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Green Mountain management losing credibility with Wall Street May 3rd 2012, 20:04 By Mihir Dalal and Brad Dorfman Thu May 3, 2012 4:04pm EDT (Reuters) - Green Mountain Coffee Roasters Inc's (GMCR.O) stock shed almost half its value on Thursday, as management lost the confidence of Wall Street after the company cut its outlook and again badly missed sales estimates. Shortsellers who have been questioning Green Mountain's accounting practices for months said the results add weight to allegations by hedge fund manager David Einhorn and others that the company had been inflating sales and that its high-growth days were over. "Last night I was like a kid on the night before Christmas at the Christmas tree, while I was waiting for their (earnings) release," said John Del Vecchio, portfolio manager of The Active Bear ETF (HDGE.P), who has been short Green Mountain since 2011. "This is the beginning of the end," he said. "We're not covering a share." A Green Mountain spokeswoman on Thursday declined to answer questions on its accounting or to give any comment. The maker of Keurig coffee brewers cut its financial forecast for the year on Wednesday and warned of slowing growth after demand for K-Cup coffee refills fell far short of expectations in the March quarter. The results and comments shook the faith of some analysts who had previously stood by the stock even as Einhorn questioned the company's accounting practices and the impact of the expiration of two patents in September. Since September 2010 Green Mountain has also been facing an inquiry by the Securities Exchange Commission into how it recognizes some revenue and its relationship with a vendor. "We have diminished faith in Green Mountain's forecasting abilities following misses in two of the last four quarters," William Chappell at SunTrust Robinson Humphrey said in a note. The analyst cut his rating on the stock to "neutral" from "buy." Also troubling to some analysts was that Green Mountain Chief Executive Larry Blanford could not explain exactly why demand was less than the company expected. "We've just got a lot of moving parts, and I think we continue to increase our capability but it's gotten even more difficult to put our arms around," Blanford said during a conference call with analysts on Wednesday. He was speaking of the company's ability to measure demand as it added new partners and sellers. Green Mountain shares fell more than 48 percent to $25.42 on Nasdaq on Thursday, and hit its lowest point in almost two years. The stock hit a lifetime high of $115.98 in September. KeyBanc Capital Markets analyst Akshay Jagdale slashed his price target on the stock to $45 from $80, but kept his "buy" rating. "As a result of the disappointing results, management's credibility is yet again under question," Jagdale said. "We believe that GMCR's growth story is still largely intact, but believe that the stock's valuation reflects otherwise." At its current share price, Green Mountain is worth $4.05 billion, down from a peak of more than $18 billion in September. According to Data Explorers, as of Wednesday, 62.6 percent of the Green Mountain shares available to be shorted are currently being done so, compared with a market average of about 16 percent. "The conference call (on Wednesday) should make it obvious that Green Mountain management team has integrity issues," said private investor Daniel Yu, a vocal short seller. The company told analysts the sales miss was partly the result of warm weather, but said it was still working to find out all the reasons for the lower-than-expected demand. COMPETITION HEATING UP Stifel Nicolaus analyst Mark Astrachan, who has been bearish on the stock for years, said Green Mountain would lose market share once its key K-Cup patents expire in September. "We anticipate competition will pressure K-Cup pricing, increase promotional activity, and result in share loss for Green Mountain, negatively impacting the company's long-term earnings power," Astrachan said in a note to clients. The fast-growing single-serve space is getting more crowded. Nestle SA (NESN.VX) has long been a competitor with its Nespresso machines, and Starbucks Corp (SBUX.O) has recently announced plans to sell its own single-serving machines, though it says it will still also sell its coffee though Keurig. "Green Mountain seems like a classic case of a growth stock cooling off, where even though the growth is impressive it is far below what was expected," said Eric Hanson, president of Green Mountain shareholder Hanson & Doremus Investment Management. Hanson said his firm had cut its holdings in the stock since Einhorn's allegations and would evaluate its investment again. (Reporting by Mihir Dalal in Bangalore; Editing by Ted Kerr and Tim Dobbyn) Link this Share this Digg this Email Reprints

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