What is “America’s Next Iconic Brand?”

Which beverage company is the Oxford Club teasing as the up-and-coming competitor for Coke and Pepsi?

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.

More?

“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.

Are you getting our free Daily Update
"reveal" emails? If not,
just click here...


“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.


Irregulars Quick Take

Paid members get a quick summary of the stocks teased and our thoughts here. Join as a Stock Gumshoe Irregular today (already a member? Log in)
guest

12345

This site uses Akismet to reduce spam. Learn how your comment data is processed.

43 Comments
Inline Feedbacks
View all comments
FarmGirl
FarmGirl
Member
May 3, 2013 10:29 pm

I use it with stevia as a sweetener and organic root beer extract from an independent supplier. Kids love it, no sugar…what’s not to like?

Add a Topic
4556
Barry
Barry
Reply to  FarmGirl
May 3, 2013 10:48 pm

Very cool FarmGirl! Love the application. It sounds like a spinoff business in the making. Did not understand the power of the product. Thanks for this! Travis – you may be in for residuals if this takes off!

takeprofits
Irregular
Reply to  FarmGirl
August 3, 2013 5:19 pm

Good for you, it seems a majority of people simply “drink whatever tastes good for them” with no health concerns, and one of the most dangerous, is the “assumption” that the “govermint” wouldn’t allow the product on the market if it was not safe. What a naive belief, and for an example, when “refined sugar” came under increasing scrutiny (rightly so) the soda industry simply switched to artificial sweeteners that are even worse. In fact increasing evidence is building that America’s “obesity epidemic” is CAUSED by the switch to so called “DIET SODA’s” which is a misnomer if there ever was one, they are more dangerous than the originals. Personally I wouldn’t drink Coke or Pepsi, Diet or otherwise if they offered me a lifetime supply for FREE, I consider all of them unfit for human consumption. The human body thrives best in an alkaline environment so why subject your delicate tissues to an acid environment strong enough to dissolve a rusty nail?

Add a Topic
1358
Add a Topic
5916
Add a Topic
2807
blackapay
Guest
May 4, 2013 1:18 am

I’m a soda drinker, but up to a limit. Nice article, it emphasizes some good points. I read it and I can tell it’s very informative as well as instructive

Revernd Idaho Spud
Revernd Idaho Spud
Member
May 5, 2013 8:49 am

Richard, does SODA march prisoners into their plant at gunpoint to work? If things are so bad at SODA then the Palestinians should go to work for an arab company in the area? Oh wait, there are none except for suicide vest manufacturing. Your attempt to blame Israel for the woes of Palestinions working at SODA ignores the fact that Palestinions spend more time fighting among themselves, you know, the Suni-Shia thing. Nice try Richard. LOL

Add a Topic
258
Kirk Williams
Guest
May 23, 2013 6:51 pm

I’ve actually looked in to buying a soda stream machine, not so much the stock, though it could be a very good buy.
I looked into it mostly as a cost thing. Would it save me money? When I added up the cost of buying the machine, refilling the CO2, and buying real Dr. Pepper syrup (yes, you can buy the real syrups to make what you want, you wouldn’t have to buy their syrups, though theirs are cheaper) it wouldn’t really save me much if any money. However, if you do a little digging there is an adapter sold on the internet that changes their proprietary thread to a standard thread that you could hook up to a hose and to a cheap, larger generic CO2 tank. With the right adapters you could probably also refill your own CO2 cartridges if you don’t want to look at the hose or don’t have a place in the kitchen for the bigger tank. If you use that it can save you a little money with real syrups, though it will significantly cut into SODA’s profits if all their customers did this. Granted, I’m unlike most consumers. Most will think they are saving money and will never do the math. Few will also do the research on finding the adapter to save money on CO2. Even fewer still will find how to build a machine that does the same thing with a standard CO2 tank, a hose, an adapter to screw onto a standard 1-2 liter bottle and do the same thing, though a little less high tech and definitely not very pretty in the kitchen. (but it will fit in a cupboard and will cost less than $40 plus the CO2 tank) hint, search YouTube, there are several.
There are also many recipes online to make your own syrups, which I assume would save even more money. And hey, you might come up with a flavor you could sell yourself.
It seems their only real pitch is the environmental one of saving the world form all the bottles and cans. That may work for them, but it doesn’t work on me. There is also the convenience of not having to carry a bunch of bottles or cans home from the store.

Add a Topic
5971
Manfred
Manfred
Guest
June 28, 2013 9:37 pm

Not sure where you shop, but prices are $0.75/can in supermarkets in Australia. And around $0.40 on special.

Remember they are talking above about cases, not individual cans.

Understandably prices are better in the US. They have so much more volume. But it’s nowhere near the price you claim.

Add a Topic
1270

We use cookies on this site to enhance your user experience. By clicking any link on this page you are giving your consent for us to set cookies.

More Info