Green Mountain Making Coffee 90% Costlier Than S&P 500

The largest U.S. seller of single-serve brewers, which plunged the most ever yesterday after its sales trailed analysts' estimates, has fallen as much as 63 percent from its all-time high in September, according to data compiled by Bloomberg. The drop, which wiped out $11 billion of market value, left Green Mountain trading at 28 times earnings, still more than 90 percent higher than the median S&P 500 company.

Green Mountain Making Coffee 90% Costlier Than S&P 500: Real M&A

Tara Lachapelle, Joseph Ciolli and Rita Nazareth

Bloomberg News

November 11, 2011

Nov. 11 (Bloomberg) -- Even after losing more than half its value, Green Mountain Coffee Roasters Inc. is still almost twice as expensive for potential acquirers as the median company in the Standard & Poor's 500 Index.

The largest U.S. seller of single-serve brewers, which plunged the most ever yesterday after its sales trailed analysts' estimates, has fallen as much as 63 percent from its all-time high in September, according to data compiled by Bloomberg. The drop, which wiped out $11 billion of market value, left Green Mountain trading at 28 times earnings, still more than 90 percent higher than the median S&P 500 company.

Green Mountain has used the Keurig business to boost its revenue fivefold in the past three years and control a dominant share of the U.S. single-cup coffee market. Still, Training The Street's Scott Rostan says any potential buyers from Nestle SA to Coca-Cola Co. and Starbucks Corp. would risk overpaying for a company that faces competition as patents on its brewing system expire in less than a year and scrutiny of its accounting practices from short sellers such as David Einhorn.

"While a Nestle or Coca-Cola or Starbucks would love to have that growth potential, that's a pretty big price for them to pay right now," Rostan, a former investment banker who trains new hires at firms from Blackstone Group LP to Credit Suisse Group AG on mergers, said in a telephone interview. "If there are accounting concerns, most acquirers are probably going to run for the hills. A suitor would have to buy the entire company and that means they would assume all the liabilities."

Today's Trading

Suzanne DuLong, a spokeswoman for Waterbury, Vermont-based Green Mountain, didn't respond to a telephone message or an e- mail seeking comment. Robin Tickle, head of corporate media relations for Vevey, Switzerland-based Nestle, declined to comment. Kent Landers, a spokesman for Atlanta-based Coca-Cola, said it doesn't comment on rumors or speculation, as did Alan Hilowitz of Seattle-based Starbucks.

Green Mountain's shares climbed 6.9 percent to $43.71 in New York today. The stock had plunged 39 percent to $40.89 yesterday, the biggest drop since its initial public offering in 1993. The company slumped after saying that fourth-quarter sales increased 91 percent to $711.9 million, trailing analysts' average projection of $757.7 million.

Wholesale customers boosted orders in the third quarter, only to cut back in the next period, Chief Executive Officer Lawrence Blanford said on an analyst call. One reason was that retailers purchased more K-Cup capsules prior to a price increase, according to Janney Montgomery Scott LLC.

K-Cup Sales

The company also overestimated K-cup sales for the fourth quarter, Chief Financial Officer Frances Rathke said.

Yesterday's slump left Green Mountain with a market value of $6.26 billion. Before reporting earnings, the coffeemaker was worth more than $10 billion, bigger than almost half the companies in the S&P 500, the benchmark gauge for U.S. equity.

While Green Mountain's price-earnings ratio has declined from a high of 89 times, it was still almost twice as expensive as the median S&P 500 company, which traded at 14.5 times yesterday, according to data compiled by Bloomberg.

Most of Green Mountain's drop came after Einhorn, president of Greenlight Capital Inc., said in an Oct. 17 presentation at the Value Investing Congress in New York that it faces a "looming patent issue" on its Keurig system that may undermine its ability to impose a "monopoly price" on the packets.

'A Good Chunk'

"I believe the available market is smaller than the bulls believe it to be and that Green Mountain has already penetrated a good chunk of it," Einhorn, 42, said. Green Mountain also has a "litany of accounting questions," he said.