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Green Mountain Coffee is flashing bearish in Keith’s quantitative model and, as the chart below shows, is indicated to have no trade support to $59.11.  From a fundamental perspective, also, we see significant risks for the company going forward.

As we wrote in our Starbucks note on Friday, we have acute concerns about the ability of Green Mountain to generate cash.  In the Hedgeye Restaurants Sustainability model, the stock screens “UNSUSTAINABLE”.  The biggest red flags in the Hedgeye Sustainability model are Asset Turns and CFFO or, more importantly, the proportion of earnings yielding cash.

Some very pressing questions need to be answered to a satisfactory degree to change my position.  Is the company generating enough cash from its operating activities to continue without accessing new external sources of cash?  What if the capital markets dry up for GMCR?

We define CFFO as cash from operating activities less capital expenditures, less the benefits from the exercise of Employee Stock Options and adjustment for one-time gains/losses or restructuring items. 

Most of the companies we follow generate free-cash flow after significant investment in the growth of the core business, while other smaller, faster growing companies do not generate free-cash flow.  This is not necessarily a negative if the cash burn rate is within the limits of available resources.  To-date, the capital markets have been very generous to GMCR, but what happens when the music stops?   

Importantly, we are looking at the proportion of earnings yielding cash.  If GMCR reports strong revenue growth, good margins, healthy profits but those profits are accompanied by negative cash earnings yield, SBUX must be suspicious, or at least I hope they are.

GMCR: TRADE UPDATE - GMCR sustainability


Howard Penney

Managing Director

Rory Green