Today we’re working from a short and “low on clues” ad from the Oxford Club, but several readers have asked and I’m always interested in investing in strong brands, so I thought we should at least see what the Thinkolator says.
The pitch is for Oxford Club membership, and the tease is that the latest issue of their Communique includes a recommendation to invest in “America’s Next Iconic Brand.” So what is it?
Well, here’s what we get by way of clues:
“Coca-Cola and Pepsi have stood unchallenged for decades, but are now facing a new contender.
“Yet most American’s have never heard of it…
“It’s a small company that’s seemingly coming out of nowhere.
“Though this company is less than 1% of their size, its sales are growing 20 times faster… due to widespread popularity with America’s youth. Just take a look at this chart tracking earnings growth over the last three years….”
I didn’t copy the chart, but it indicates that this company has grown earnings by 20%+ in 2010, 45% in 2011, and 50%+ in 2012 — while KO and PEP have mostly shown comparatively flat or declining earnings. The data that informs that chart is kept somewhat vague in the ad, but we’ll use it to check the Thinkolator’s results.
“With the company bringing in multi-million dollar annual sales and double-digit profit margins, it only stands to get bigger in the months ahead.
“Consider… If the company grew to just 3% of the size of Pepsi, the share price would have to triple or more.”
And, of course, there’s a sense of urgency — why else would you quickly reach for your wallet?
“… this invitation is only open until Wednesday, May 1 at midnight. So please act quickly.”
That’s just the “special” deal on Oxford Club membership, of course, there’s not necessarily any particular reason the stock will be different tomorrow than it is today — but with that in mind, what is this secret stock?
Well, those clues are thin, but the Thinkolator is mighty and, well, there just aren’t that many beverage companies that could match our tease. So which one is it? We get a pretty high-certainty answer that this must be: SodaStream (SODA)
You’ve probably seen a SodaStream device, or heard of the stock during it’s sparkling performance since going public a few years ago — this is basically a modern day version of the rat pack’s soda siphon, a countertop device that charges your tap water with CO2 that you can then flavor (if you want to) either with your own mad scientist formulations or with prepackaged syrups that Soda Stream sells and that mimic popular drinks, including Diet Cola, Dr. Pete, and pretty much any other popular soda flavor you can think of, including energy drinks. The company has been around for more than 100 years, and is headquartered in Israel and has been a significant player in the European market for a long time, but it’s only been in the last five or six years that they’ve tried to become a substantial US competitor and build up their distribution network here, funded in part by their IPO in the US in 2010.
The basic business model is very familiar — think of it as razor and blade, or ink and printer, or whatever comparison you want to use. They make some money or break even by selling their carbonating machine (usually a “starter kit”), and then consumers are locked into the machine so they make much higher-margin sales of recharged air tanks or pouches of flavored syrups.
That’s why Gillette became a massive success, and why the Da Vinci surgical robot is making millions, and why HP and Epson raked in high-margin bucks for decades giving away printers and selling ink — once you’re locked in to a product, you make purchases of replacement parts or accessories or consumables for a long time. It’s also what appealed to investors about perpetual headline maker Green Mountain Coffee Roasters (GMCR) and their Keurig machine and K-cups (though the loss of the patent on those K-cups is a risk).
SODA is pretty much the only notable, growing publicly-traded soft drink company that’s priced at around a billion dollars — meaning, it’s less than 1% the size of either Coca Cola or PepsiCo but still big enough to be taken seriously (and match the few teaser clues). There are other upstart beverage companies trying to take share from Coke and Pepsi, including fairly large growth darlings like Monster Beverage (MNST — the former Hansen) or Dr. Pepper/Snapple (DPS), but those are not growing anywhere near 40-50% and they’er already close to $10 billion companies. There are also smaller ones like Reed’s Ginger Brew (REED) or Jones Soda (JSDA), or any number of “functional drink” purveying penny stocks, and others that might feasibly be considered competitors like private-label beverage company Cott Corp (COT), but nothing matches SODA for growth and size.
I’ve not owned a Soda Stream device and I’m not a big soda drinker, but it looks pretty simple and it could certainly save money if you drink cases of Diet Coke every month — perhaps more importantly, it’s also making a “green” pitch, particularly to younger consumers who are already getting the message about the wastefulness of the bottled water industry. Shipping a soda stream device and a few small bottles or pouches of flavoring is much less energy-intensive than driving a few cases of soda around in a truck. Soda and bottled water are fairly decentralized already, I suppose, with regional bottling plants, but there are still lots of gallons of diesel fuel burned for each truckload of Coke bottles delivered to every convenience store in America. So that’s part of the marketing appeal, and they juiced that appeal even more by getting their proposed Super Bowl ad banned — you can see that ad here if you’re curious:
SODA is clearly a momentum growth stock, it has been putting up great numbers and is growing earnings at better than 40%, which makes their trailing PE of about 25 look quite reasonable. They missed the earnings estimate by a few cents last quarter, but analysts still think that while growth is tapering, it will continue to be very strong — 25% earnings growth next year on a 15% increase in sales, and 30% earnings growth on average over the next several years, so analysts are looking for strong top and bottom line growth and margin expansion, which is a recipe for spectacular stock performance.
Will it work out? Well, in my few minutes looking at the numbers I can’t tell you that — I will note that there is a HUGE short position in the stock, more than 40% of the free float is sold short (meaning investors are betting it will fall), so there are some smart people who are betting the other way, though the short position was even larger earlier in the year. Earnings are expected to come out on May 8, so that’s your next potential catalyst — a lot of the questions and concerns for SodaStream have been operational over recent quarters, with cost management and the rush to get product into stores for the holiday season and distribution problems raising some questions. SodaStream is an old company, they’ve been selling their evolving products for decades, but this push to become a major player in the US soda market is certainly a higher risk/higher reward proposition — I haven’t followed their quarter-by-quarter progress, but the current numbers make it look like they’re making the right moves.
You can check out the last quarterly conference call transcript here to see the kinds of things analysts will be looking for — SODA is still trying to expand distribution, and they recently made a deal with Cott to produce more flavors in the US to improve availability, and with growth of machine sales still very strong in the holiday quarter I expect they haven’t come close to exhausting their addressable market, and I haven’t noticed any competitors of note coming out of the woodwork yet, so if you think the appeal will continue to grow for this product there’s every chance it could be a good investment. Just remember that with growth stocks come growth expectations, those short sellers are there for a reason. Big short positions amplify stock moves sometimes, so if, for example, SODA comes out with a blowout performance next week the stock might rise even more dramatically because the short sellers could be forced to “cover” their short positions by buying the stock — that’s called a “short squeeze” and it’s not necessarily predictable, but it’s a possibility. On the flip side, of course, if they come out with a quarter that’s much worse than expected, or talk about further distribution bottlenecks and talk down the rest of the year’s expectations, the stock could drop dramatically as momentum jockeys move on. It’s not a dramatically overpriced stock, certainly not for the growth numbers they’ve been putting up, but it is priced for growth.
I don’t know what numbers the short sellers are looking at, but I suspect they’ll pay close attention to sales of machines, the status and costs of the distribution network, and how the numbers look for air tanks and flavor pouches versus machine sales — ie, looking at whether all those folks who got a SodaStream for Christmas are buying up flavor refills. I haven’t thought much about this stock since the IPO, but I’ll certainly take a gander at their release next week.
There’s a good article about SodaStream here from the New Yorker, FYI, in case you’d like more of a “big picture” thought about the company’s prospects. And I’m sure there are plenty of readers out there who’ve had their own experiences with the stock or the product, so feel free to share your thoughts or opinions with a comment below. Or, of course, you can tell me if you think the Thinkolator’s full of gas on this one and missed the answer.