Time to eat humble pie with some Green Mountain Coffee?
Green Mountain Coffee Roasters Inc. (GMCR) reported excellent 2010 Q1 earnings on January 28th. No doubt followers have read the earnings reports and the conference calls transcript and now have a buzz on even stronger than two cups of Green Mountain Dark Magic could deliver. So is it time for this bear to wash some humble pie down with a cup of joe? Absolutely not!
One quarter does not bring the fat lady out to sing. In my bearish arguments here and here I argued that the main reason to put GMCR on a shorting watch-list is valuation. GMCR is overvalued and whether it takes one quarter or two years, companies sporting its valuation metrics end up under-performing the indices.
But you’ve heard that before, so today I’ll dig deeper into this quarters earnings to see if there are any red flags appearing yet.
First up let’s look year on year changes in receivables and inventories compared to revenue. Thornton O’glove explained the importance of tracking these two key metrics in his brilliant book Quality of Earnings
As I highlighted in my first post, 2009 receivables were up 67% slightly ahead of sales 61% increase, while inventory was right on the money up 61%. Those figures were nothing to be concerned about. In contrast, this quarter’s receivables and inventories have grown considerably faster than sales. While sales climbed a heady 77% year on year, receivables and inventory climbed even faster and were up 100% and 86% respectively. GMCR bulls should now be getting restless legs. (I promise that’s my last coffee reference!)
While some bears have been trying to paint this quarter as a disaster and even using the F word, I think they’re painting a bearish story that doesn’t exist. Don’t get me wrong, I am bearish on GMCR, but I prefer well reasoned analysis based on facts. So while G&A increased a concerning 152% YoY, expenses overall were only up 73%. Still the 152% G&A certainly warrants closer inspection. A quick check of the conference call highlights the reason “we incurred approximately $5 million of M&A expenses for both Timothy’s and the pending Diedrich acquisitions, which are included in the G&A expense line“. Still investors should keep an eye on those expenses in future quarters.
Earnings were slightly down year on year, but as anyone familiar with GMCR knows that’s due to the $17million patent settlement revenue in Q1 2009 and is not a concern. Adjusting for the patent payout and tax I calculate earnings per share was up 166%.
Days sales outstanding deteriorated year on year, increasing from 36% to 40%. This is a secondary confirmation point that there may be a looming problem in Green Mountain’s distribution chain. I recommend GMCR bulls keep a close eye on their favorite Green Mountain stockist for any signs of GMCR’s products being relegated.
Another possible warning sign was cash from operations was down 77%. However, that is not as bad as it first seems. Remember the year ago period’s net income was inflated by the patent settlement. The other main reason for the fall was the aforementioned ballooning of receivables. Another factor was the $10million charge for other current assets. Can anyone provide insight into that charge?
All in all I think this was a great quarter for GMCR with excellent top line growth and improved gross margins. I wish bulls all the best for future returns, though once again reiterate my warning that in the long run the share price has no room to provide acceptable returns. Receivables and now inventory are starting to flash warning signs so tread carefully.
Disclosure: No position in GMCR
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