Thursday, May 19, 2011

Green Mountain Coffee: Getting by with a little help from their friends

The cozy relationship(s) between Green Mountain Coffee (GMCR) and parties involved in underwriting their latest stock offering showed the investment community just how you pull-off a successful dog and pony show these days. Talk about a team effort!

Yet, contrasts and timing of related party analyst blurbs prior to and leading up to the offering are peculiar and noteworthy:

March 2, 2011: Janney Montgomery Scott analyst upgrades Peet’s Coffee (PEET) to buy on based on “our” view that PEET would likely join the Keurig platform (which is a unit of GMCR). Janney Capital analyst Mitch Pinheiro claimed he had no knowledge of a potential agreement.

March 10, 2011: JMS lowers rating on PEET to “sell” on the the Starbuck’s / GMCR deal announced that morning. SunTrust Robinson Humphrey raises its GMCR price target to $74 from $50 (keeping a BUY rating on the shares).

JMS says GMCR shares have a target price of $90 a share, which at the time was the highest target price on the street.

May 3, 2011: GMCR announced second quarter earnings which beat estimates handily. The company also announced it would sell 7.1 million shares.

May 4, 2011: GMCR files Form 424B7 listing B of A / Merrill Lynch as sole book-running manager; co-lead manager is Sun Trust Robertson Humphrey. Other co-managers include JMS, Cannacord Genuity amongst others.

May 6, 2011: SunTrust Robinson Humphrey raises GMCR’s price target to $95 from $75

May 9, 2011, Cannacord Genuity ups GMCR’s price target to $97 from $65 while JMS raised its price targets and estimates, saying GMCR shares could fetch up to $100.   Both cite expectations of margin growth. 

May 11, 2011, equity analysts at B of A Merrill Lynch raised their earnings per share estimates on GMCR and have a $90 price target. GMCR announces that it closed its underwritten public offering for almost 9.5 million shares, substantially larger than the original 7.5 million shares suggested in the 424B7 filed May 4th.

We have long been skeptical to the Green Mountain story only by virtue of the preponderance of non-cash accounting used to support earnings in recent years.  But this secondary, in our view, vividly reveals a murky distinction between the so-called “Chinese wall” and conflicts of interest in today’s markets.

You can't blame a company for striking while the iron is hot, but we can't help but think team GMCR pulled out all the stops in making this deal work.  Timing is everything these days.

Investors have made a lot of money on this stock, but keep in mind that insiders just dumped $28 million of stock.  This, at a time when analysts are most bullish on the company. 

Who knows, maybe GMCR and its primary lenders (incl. B of A and several others involved in the underwriting) felt that by paying down debt, being taken over would be more digestable to a potential (deeper pocketed) suitor.  Or, perhaps B of A's problems are serious enough that they wanted GMCR to whittle-down the debt load, despite their own analyst's  rosy outlook for GMCR going forward.

Then, there is the Lavazza angle to consider. 

All we can say with any certainty is that the stock remains overvalued from a operating cash flow basis, even though they penned numerous "deals" with Dunkin Donuts, Starbucks, Con Agra and despite an ongoing SEC investigation.  The larger question though, with such bright growth in recent quarters and a brighter outlook (according to analysts whose affiliates have material relationships with GMCR), why the rush to raise capital and insider sales?

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