I recently wrote an article explaining why I believe Sodastream (SODA) to be the most undervalued stock in the soft drink industry. Part of the bullish case shared by many SODA bulls is that the SODA business model is a similar "razor and razor blade" model to Green Mountain Roasters (GMCR). GMCR's proven success = success for SODA, as the theory goes. But bears pointed out that both were possibly fads subject to competition with the GMCR's k-cup coming off patent and the consumables sales for SODA, likewise, at risk for competition as there's no patent protection for others to simply make a flavored syrup.
With GMCR having two key patents expire during Q3, all eyes were on Q3 results.
After hours on Tuesday, Green Mountain Roaster reported sales and earnings that absolutely crushed the analyst consensus. Sales came in at $947 million, a $45 million beat, EPS came in at .64, a beat of .16 per share or over 33%, and they gave a glowing outlook. This news sent GMCR straight up after hours in a caffeinated-like jolt, finishing the after hours session up 21% on giant volume. What's particularly interesting is how it relates to Sodastream.
And the good news doesn't stop there. In the conference call that accompanied the earnings release, President & CEO Larry Blanford delivered GMCR bears and shorts some really disappointed news:
"I'm pleased to say that we've not seen any marketplace dynamics that have caused us to think differently about our outlook for single serve packs. We continue to believe that growth in sales of system-wide single serve packs will generally follow the growth in the installed base of brewers over time."
So what's going on? Two words immediately come to mind: BRAND LOYALTY
And where is brand loyalty more familiar than with soft drinks? GMCR earnings make it clear that consumers for the most part aren't quick to jump from their favorite drink brand when it comes to home beverage brewing. And this is bigger news for SODA than it is for GMCR since, as CEO Dan Birnbaum pointed out on CNBC:
(1) Soda is consumed by all members of the family. Not just adults.
(2) Soda is consumed all day. Not just mornings.
(3) Sodastream, though growing a lot faster, has a much smaller market size for consumables in the United States. If competitors can't make much of a dent in GMCR's consumable market, it may be a while before it's even worth trying to compete with Sodastream.
Another claim that the GMCR earnings beat up is the fad claim. GMCR has been accused of being a fad for years on end yet keeps on growing. Sodastream is getting the same accusation. Strange. Since when is anything coffee or soda related a fad after it last a number of years? Starbucks (SBUX), Coca-cola (KO), and Pepsi (PEP) etc. knows that once you break into their exclusive club and sustain and grow for a few years -- you're here to stay. Me personally, as a user of both systems, I often wonder how I ever survived without them.
SODA was already sporting a cheap valuation probably in part due to the perceived risks that were similar to GMCR. In light of GMCR's earnings, perhaps SODA can start to swing to a respectable valuation via a higher stock price. GMCR results give the green light for SODA to go ahead and rally. Its business is safer than many people think.