GREEN MOUNTAIN COFFEE ROASTERS’ PROFITS: OVERSTATED OR MISUNDERSTOOD

Based on a recently released SEC correspondence letter that provides previously non-public k-cup gross margin information, LongShortTrader believes GMCR’s 2011 gross profits and net income are overstated by $100 million and $160 million respectively (more or less). Otherwise, GMCR is misrepresenting the economics of its business, is not a “razor, razor blade” business, and actually makes higher margin on its brewers & accessories than it does on its k-cups.

If gross margins are overstated, 2011 EPS is more like $0.60, not $1.30, which means the PE ratio is more like 35.9x, using Wednesday’s closing price of $21.71 per share. Slapping a multiple between 10x and 20x gets you to a $6.00 to $12.00 stock. This analysis does not address the possible understatement of operating expenses (which would lower earnings even more).

If someone, either from GMCR itself or one of GMCR’s bulls (for example, Goodnow Investment Group, Wellington Management, or Capital Research Global Investors) has an alternative explanation, please contact LST. If a satisfactory, alternative explanation is provided, LST will mail a box of (expired) k-cups, flavor of your choosing.

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