I recently read a good interview that Reuters had with David Einhorn (of Greenlight Capital fame) where they discussed in detail his Green Mountain (GMCR) thesis. He makes it sound as if he is still short (this despite the initial massive 40%+ drop and subsequent rally).
The full interview can be found here.
Here is an excerpt of my favorite parts:
REUTERS: Which of the issues you raised in your presentation do you believe Green Mountain has answered so that you would change them?
EINHORN: "Actually, I think everything we said in the presentation is as right now as it was then -- and in many cases even more so. Some of the things we pointed out, like the inexplicable sales of K-Cups in the June quarter, have now been revealed to have been very valid concerns and the rest remain unanswered. And some of them are things will have to sort of play out in the future like the competition."
REUTERS: Management says that fourth-quarter sales were hurt by wholesale orders, and do not indicate any accounting issues. In other words, you were right, but for the wrong reasons. Were you surprised by the earnings miss?
EINHORN: "The thing about an investment like this is that there are really a lot of ways for us to come out well because the risk-reward for the stock is so poor. And there are so many problems that they don't all have to hit at the same time in order for us to get a good result. In terms of what actually did cause them to miss the quarter? It was largely a sales miss, which seemed to follow from the unexplained sales spike that we highlighted in the presentation."
REUTERS: Management stated, "Though disappointing, we take the recent allegations of misconduct seriously. Our Audit Committee has reviewed the allegations and we are confident there is no misconduct. There is no wrongdoing." What is your response to this?
EINHORN: "Simply saying that you take allegations with misconduct seriously does not mean that you actually take the allegations of misconduct seriously. In other words, their response came only about three weeks after the presentation and there was an enormous amount of material that if somebody was going to take the material comment seriously, they would have to review. It doesn't seem to make a lot of sense to me -- or even be possible -- to think that somebody who took our concerns seriously would even be able to review it in three weeks. As a result, it kind of feels like a whitewash to me. The question at this point, since the company wasn't able to give any substantive answers to the most serious of the questions that were raised -- they instead deferred to a general statement from the audit committee -- the question now becomes whether the audit committee itself is part of the problem as opposed to being a part of the solution."
REUTERS: One of your concerns was that Green Mountain couldn't explain its capital spending. When the company announced earnings, it detailed its capital spending for 2011 and 2012 by category. What did you take away from that?
EINHORN: "I actually think the extra information led further support to our view that the capital spending is unlikely to be going for the purposes that Green Mountain says that they are. In the sense that when you break out the spending, they broke it into various categories.
"For example, they say they are spending $225 million this coming year on portion packs. By our calculation, that would be enough to add approximately 15 billion K-cups of annual capacity. And yet the company only needs to add about 4 billion cups of capacity. So there is a rather large delta there. But the clearest one of all (involving Green Mountain's capital spending) actually is the manufacturing facilities where they said that they are going to spend $175 million. They said the big pieces of this are at their expansion in Virginia and in Ethics, Vermont. We went into the various property records and the building permits relating to these kinds of expansion and we were only able to total in those properties -- and actually including another property in Waterbury, Vermont -- we were only able to find about $50-60 million of capital spending on the pieces that they say are the biggest pieces of the $175 million facilities and infrastructure spent.
"All of this adds together to leave us with the view that it is very unlikely that they have an adequate explanation for where approximately $665 million of capital spending can reasonably go to support the growth of this business."
REUTERS: After Green Mountain announced earnings, there were a raft of insider purchases. Is this a bullish signal for the stock?
EINHORN: "This is something that we see in a number of these types of positions, where when there is an effort by a management team to promote the stock they go and get a large number of insiders to make what we call nominal purchases or to use a term of art to 'paint the tape.' But what's interesting here is that you have a team where they've literally sold stock in the hundreds of millions of dollars -- and are buying back stock in the hundreds of thousands of dollars.
"In the more clear example of this, Michael Mardy (Director) sold 20,000 shares for $97.48 on August 5, 2011. He purchased 1,000 shares for $43.36 on November 14, 2011. David Moran (Director) sold 10,000 shares for $98.50 on August 5, 2011. He purchased 1,180 shares for $42.17 on November 14, 2011." (A Green Mountain spokeswoman said the August insider sales were part of a previously arranged share selling program.)
REUTERS: What's fair value on Green Mountain stock?
EINHORN: "I don't think there's any way to know for sure what the fair value is. When I think about this company, I think about the cash flow that it generates. And right now, the company should be in a fantastic position because it still has the monopoly on the ability to make K-cups. And despite that, the company has no cash flow from operations and has substantial capital spending. So it seems to me that a business that doesn't generate any cash -- and this is before the monopoly position on the K-cups disappears next September -- if you don't generate very much cash, it's hard to understand why there is a large value."