Beat the Market With This Stock
Eshna is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
SodaStream’s (NASDAQ: SODA) story has always been appealing. But the fact that the stock avoided most of the volatility of the last few days is clear indication of the strong positive sentiment surrounding the company.
The stock had seen some fast action in the first part of the month as the Israeli press reported speculations about possible buyouts from both Coca-Cola and PepsiCo. However, the former has refused to comment while the latter has denied the rumors.
Irrespective of whether a buyout happens or does not, SodaStream has fantastic prospects, which should be very attractive to long-term investors.
Compelling growth numbers
Between 2009 and 2012, SodaStream has more than tripled its revenue, growing at a CAGR of 47%, while net income surged at a CAGR of 71%.
During this period, the company has expanded its global reach to 45 countries and some 60,000 retail stores across the globe. It has made the US its single largest market, with SodaStream products sold in over 15,000 stores.
It has also struck co-branding deals with reputable companies for bringing new flavors into the market. These include alliances with Ocean Spray, EBoost, Kraft, Breville, and Campbell’s. SodaStream offers around 160 flavor syrups.
Green Mountain Coffee Roasters (NASDAQ: GMCR), which makes single serve coffee brewers and has a similar business model to SodaStream, has already shown the benefits of strategic partnerships. It has alliances with big companies like Starbucks and Unilever for selling the former’s coffee flavors and the latter’s tea flavors for its K-cups and Vue-packs.
But this is just the icing on the cake. Green Mountain has similar agreements with 30 more brands. Analysts are expecting 12.8% revenue growth this year and another 12% next year.
Biggest growth driver
But for SodaStream (and also Green Mountain) maximum growth comes from its business model, which replicates that followed by Gillette and the likes. This razor/razor blade model implies that once the company sells a soda machine, it automatically triggers sales of CO2 refills and flavors.
This is corroborated by the fact that the growth rate of flavor syrups has outpaced that of soda machines. Between 2009 and 2012, unit sales of soda machines have grown at a CAGR of 49% while that of flavor syrups have grown at a CAGR of 57%.
This phenomenon will get more pronounced as markets mature. Between 2011 and 2012, soda machine sales increased by 29% while flavor sales grew 49%. And it helps that margins on consumables are much higher than that in base soda machines.
Now, SodaStream has announced its big target of reaching $1 billion in revenue by 2016. Given that it generated $436 million last year, the objective at first glance may look a little hard to achieve. But if we look at the underlying assumptions we can safely conclude that the company will get there.
SodaStream has factored in a CAGR of 23%, which looks very achievable given that the company is still in its early stages of growth and yet to tap big opportunities. The push will come from more penetration and brand awareness across the globe. The two recent partnerships with Samsung and Whirlpool (NYSE: WHR) are also prospective.
SodaStream aims to have a 10% household penetration in all its operating markets. Although it has double-digit rates in some countries like Sweden, Finland, the Czech Republic, and Israel, its average penetration rate is still 2%. Even in its largest market, the US, it has a presence in just 1% of households.
According to Euromonitor, in 2012 about 251 billion liters of carbonated soft drinks and 31 billion liters of sparkling water were consumed. In these two categories SodaStream’s share of the market was just 0.2% and 2% respectively. This leaves vast territories to be explored and developed.
The company is building its brand awareness by positioning it as a preferred choice of upscale departmental stores like Macy’s, Harrods, etc. It is creating a stylish and innovative product range through partnership with leading designers like Yves Behar. And it has already produced an avalanche of flavors.
It also has some smart tricks up its sleeve, like the counter on its website that is eternally counting the number of wasteful bottles being used across the world.
Powered by SodaStream
SodaStream has struck two deals in a row with Samsung and Whirlpool. The first one involves an inbuilt carbonation system in premium Samsung RF31FMESBSR four-door refrigerators. The other one involves jointly developing soda machines for Whirlpool’s KitchenAid brand. In both cases “powered by SodaStream” will be printed on the packaging.
Samsung and Whirlpool are huge names in the home appliance world, and a tie-up with them provides SodaStream with immediate access to millions of households across the world. This would mean promotions on a scale that would have been impossible otherwise.
The deals would help the cause of the two partner companies as well. Samsung has priced this refrigerator at $3,900. A similar French-door refrigerator without the SodaStream novelty is priced at $3,000.
Whirlpool would also see some incremental gains from this new offering. Whirlpool is a mature company and revenue gains are difficult to come by. In fact, in the first quarter the company had reported a 2.3% decline in revenue to $4.2 billion. So, any extra sales would be welcome.
KitchenAid has so far been content with mostly toasters, mixers, juicers, and other conventional products. The soda-maker could be a good novelty in its product line.
SodaStream has just started growing and should do so by leaps and bounds over the coming years. Its excellent management, great strategies, and most of all good products make it a compelling investment option. If any of the soda giants acquire it, it’s going to be a big opportunity for investors, and if they don't investors have nothing to lose, only to gain.
With Green Mountain as cheap as it's ever been, many investors are wondering whether this is the end of the former market darling, or the perfect entry point for an enormous rebound. You can find our recommendation for how to play the company in our premium research report. In it you'll find everything you need to know about Green Mountain, including whether it's a buy at today's prices. Click here for instant access.
Eshna De has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters and SodaStream. The Motley Fool owns shares of SodaStream. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!