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May 09

David Einhorn’s Battle Against Green Mountain Coffee

Donut House Coffee

David Einhorn, the leader of Greenlight Capital, began taking shots at Green Mountain Coffee Roasters (GMCR) all the way back in 2011 when he spoke during the Value Investing Congress. Back then, GMCR was trading at about $69 per share. Notably, GMCR is the company behind Keurig single cup coffee makers. According to the website Investopedia.com, sales had been on the rise since 2008, and analysts believed that trend would continue, thanks to a deal signed with Starbucks, which gave GMCR the rights to the bear the brand’s name on some of its Keurig cartridges.

Einhorn Takes Aim

Despite the increase in profits, Einhorn’s 2011 presentation discussed how GMCR wasn’t generating free cash flows, and was continually investing heavily in capital expenditures. Additionally, Einhorn cited concerns about how the patent on GMCR’s K-Cups was about to expire. These items are essential to the Keurig brewers, and Einhorn believed that without a patent, competitors would rush to bring their own equivalent items to the market.

Einhorn’s words had power. According to an article in Forbes.com, just a few seconds after Einhorn began his speech against GMCR, the stock plummeted more than 3%, although it quickly rebounded to a position of being up slightly over 1% when the day came to a close. Over time however, shares of GMCR stock fell more than 80%, bottoming out at less than $20 per share between September 2011 and September 2012.

Could Starbucks Compete with Keurig?

At the end of 2012, Starbucks released it’s Verismo home brewing machine, which was expected to be a major competitor to the Keurig appliance. Surprising to some, GMCR reported an 18% increase of Keurig machines, totaling a figure of 4.95 million. In contrast, Starbucks was only able to sell 150,000 Verismo machines.

GMCRs Response

Rather than feeling threatened by Einhorn’s predictions, GMCR refocused on asserting dominance with Keurig machines. Besides continually enhancing their products and discounting the machines to appeal to a wider audience, GMCR also began forging strategic alliances with brands like 8 O’ Clock Coffee and Dunkin’ Donuts. This past January, warehouse brand Costco created a deal with GMCR allowing the latter to become the exclusive manufacturer for Costco’s Kirkland Signature brand of K-Cup cartridges. Furthermore, GMCR gained the rights to distribute products from Snapple and Lipton in K-Cups. With these achievements, it became easier than ever for people to enjoy favorite beverages without having to leave home.

Starbucks Logo

Poor Results for Einhorn

As reported in the New York Times, Einhorn was eventually forced to tell investors that his bet against GMCR ultimately meant his hedge fund suffered a “setback,” especially after GMCR stocks climbed 74% in the first quarter of 2013. Overall, Greenlight Capital saw a 4.9% loss last quarter, and caused Einhorn to say that the firm’s performance last year fell “short of our goals.” Even so, Einhorn kept a positive attitude, saying that during the fourth quarter, his company was on track to perform better moving forward.

Although last year wasn’t all Einhorn had hoped for, he still holds sway with investors. In fact, his name has even been turned into a verb, “Einhorned,” used to describe what often happens when he predicts the fall of a company’s value. Clearly, a few missteps aren’t enough to make Einhorn become less relevant, and investors and analysts everywhere are surely holding their breath to see which company will be the next to cross his lips.

Author Jena Daniels is a blogger for business sites. Want to learn more about the way business works? You might be interested in the flexible online mba programs in California.

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