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2012-1-13 Sodastream, SODA:Nasdaq

Author: Thomas Efthimiou, Portfolio Manager        January 13, 2012

Why Why Sodastream May Be a Multi-baggerBe

First theme is that it is rare that a ‘game changer’ comes along; a revolutionary product that changes the way a multitude of people do things.  We believe one is at hand, the likes of which we haven’t seen in quite some time. Sodastream is a company whose products let people make their own soda at home, plain and simple.

Let’s get right to the bottom line: Sodastream has surpassed earnings and sales estimates repeatedly since going public in December 2010.  Earnings estimates have not been brought down once. As an asset manager, that’s the first criteria we look for.

Misnomer by the markets: Green Mt. Coffee Roasters and Sodastream: Razor & Blades is where the comparison ends.

Every time we hear someone mention a stock that begins with “the next…,” I cringe, i.e. the next Microsoft,  or the next Amazon, or the next Cisco, or the next [fill in the blank].

In 99% of those referrals, the ‘author’ really means that the enormous gain of the original company is about to be replicated for any number of similar reasons.

99% of the time this doesn’t pan out nearly as expected for the simple reason that Goliath was created, and David is simply trying to catch up and stop a freight train with a slingshot.

The same analogy has been made for over a year in comparing Sodastream to Green Mt. Coffee Roasters. Green Mt. started a superb stock run years ago when it’s single serving K cup machines started selling in earnest [the razor] and customers then turned into repeat buyers for the K cups [blades].

Sodastream which came public in December 2010 also sells a machine [razor] and purchasers then buy flavors and carbonators [blades].

In our opinion, and widely missed by the consensus, that is where the comparison ends, pure and simple.

We are skipping what each machine does not to overextend this, and jump right to the differentiation and importance.

The value in making a single cup of coffee is no clean up and a quick and easy product. However there is little comparable value vs going to the grocery store, buying a tin of coffee, some filters and making a pot every morning. It’s novel and surely more valuable in an office environment, but while it’s light to carry home a box of K cups, it’s also light to carry home a tin of Folgers or Chock Full of Nuts, weight wise.

The real value in making home soda in a Sodastream is that the buyer is saving lugging home 20 or 30 lbs of water each and every time a case of soda is being bought.  Coke, Pepsi and every other soda you buy at the store is probably 95% water, 5% flavor and carbonated at the plant.  In making ones own soda by waiting until you get home to add the water you ostensibly are avoiding carrying 95% of the weight home every time.

Other benefits of course are little storage space needed for the liter bottles and flavors, and the green aspect by almost eliminating plastic bottles and cans from standard soda buying.  Also contrary to the consensus is the importance of price per unit.  We believe as long as the long term pricing is relatively similar, the real value is in the transportation convenience mentioned above.

Management - At the forefront of every major company whose stock has performed spectacularly has been a dynamic leader. Daniel Birnbaum is the company’s CEO and is regularly visible at meetings, conferences and leads all quarterly earnings conference calls enthusiastically.        

Competition – Retail Distribution & The Big Boys:   Primo Water has produced the only current possible competing unit to Sodastream.  Their unit is Flavorstation and utilizes flavor cups similar to Green Mt’s K cup system. Through a series of mis-steps they are late to the game, as their only retail distribution other than the internet currently is Lowe’s. Sodastream, which started in Europe and now is focused on growth in the Americas started with Bed Bath & Beyond, Williams Sonoma & Sur La Table, but now has almost all of the notable retailers selling their machines, such as Target, Best Buy, Staples, Costco, and plenty more.  Sodastream will probably be sold through WalMart this coming year.

Coke and Pepsi have been silent on anything to do with making soda at home. Either they believe that this possibly is a fad and acknowledging the headway that Sodastream has made is ridiculous, or they are covertly working on plans of their own to be announced sometime in the future.  Of course this would create two problems for them: a. this would vilify what Sodastream is doing, thereby giving Sodastream [who has first mover advantage] instant credibility for the long term, and  b. would devastate all the bottling companies worldwide who rely on combining carbonation and flavoring with water for distribution.

Kraft, one of the worlds best known companies for their various brands, has entered into an agreement with Sodastream to create and distribution their own flavors to be used with Sodastream machines. This is the first offering Kraft makes to be used with carbonated beverages. This is a huge feather in Sodastream’s cap to have such a world leader as Kraft commit to their system.

Geographical concerns: Sodastream is an Israeli based company, with offices and a production plant on [or near] the Gaza strip.  Although company management has made a point of hiring non discriminatorily from all aspects, one possible fear is retaliation purely mirroring the clashes that occur between Israel and Islamic countries. Although Sodastream reports in Euro, management has alluded to reporting in US dollars when the Americas become the majority of their business.

New Products - are spoken about regularly and the pipeline seems to show multiple new products that will span households, restaurants, and cover a gamut of consumer choices for soda and sparkling water.

Conclusion – It has been said by very wise people on investing in a company, that you should be able to describe what they do in 20 seconds or less, and their business should be simple enough to be understandable by an eight [?] year old, because sooner or later it might be run by one.  We think ‘Sodastream turns ordinary tap water into sparkling water and flavored soda anywhere you want’ certainly explains what the company does within 20 seconds.  First mover advantage, strong metrics financially and geographically and a strong management team, fits the bill in our opinion for significant long term growth.

Disclosure: Author currently owns shares of Sodastream as well as family members. Clients currently own shares of Sodastream.

THIS DOCUMENT EXPRESSES THE OPINIONS OF THE MANAGEMENT OF GMG ASSET MANAGEMENT, INC. AS OF THE TIME IT IS WRITTEN. ANY FORWARD LOOKING STATEMENTS ARE SUBJECT TO CHANGE AT ANY TIME AS A RESULT OF MULTIPLE FACTORS WHICH MAY ALTER THE OPINIONS OF MANAGEMENT. THE ACTIONS OF THE MANAGEMENT OF THE PARTNERSHIP AND INDIVIDUAL ACCOUNTS WITH REGARD TO TRADING ACTIVITIES MAY DIFFER DRAMATICALLY WITH THE INFORMATION CONTAINED HEREIN WITHOUT NOTICE AS A RESULT OF CHANGING ECONOMIC AND FINANCIAL CONDITIONS. THE AUTHOR INCORPORATES INFORMATION FROM SOURCES DEEMED TO BE RELIABLE BUT DOES NOT GUARANTEE ITS ACCURACY.  THIS DOCUMENT IS FOR THE SOLE USE OF LIMITED PARTNERS OF GMG CAPITAL DEVELOPMENT, L.P. AND CUSTOMERS OF GMG ASSET MANAGEMENT, INC. AND MAY NOT BE RELIED UPON BY ANYONE OTHER THAN CLIENTS OF EITHER , REPRODUCED, COPIED OR DISTRIBUTED WITHOUT PRIOR WRITTEN AUTHORIZATION BY GMG ASSET MANAGEMENT, INC.  PAST PERFORMANCE DOES NOT PREDICATE FUTURE RESULTS AND ACCOUNTS MAY LOSE VALUE.

 

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