Seeking Alpha
Recommended for you:
Long/short equity, research analyst
Profile| Send Message|
( followers)  

Soda Stream (NASDAQ:SODA) is one of the fastest growing companies participating in the consumer goods sector. The company's rapid growth and expansion into 44 countries around the globe has gone largely unrecognized by investors. Wall Street has locked up shares of Soda Stream and accumulated nearly 100% of the available float, leaving the average retail investor on the sidelines. Soda Stream is headquartered in Israel, but trades publicly in the United States and is listed on the Nasdaq.

The retail investor has not played a significant role in the SODA story and this may be in part because they haven't heard of Soda Stream. The company entered Bed Bath and Beyond (NASDAQ:BBBY) only 2 ½ years ago and didn't see broad scale retail distribution expansion in the U.S. until Q4 2011. Even today with over 14,000 U.S. retail doors under the company's long list of retail partners, if you go into a Wal-Mart store and ask an employee where the Soda Stream products are, you might very well get a puzzled look on the face of the employee.

Marta Mikita is the President of Soda Stream Canada. She was recently interviewed by Julie Bagley of "The City Wire" publication in Canada. Mikita explains in this article how most consumers still don't know what a Soda Stream is or what it does. Mikita says, "The Soda Stream stands alone in its category inside stores. What kind of product is it? Drink? Health? Environmental? Entertainment?" She goes on to say, "You can't just put this on the shelf."

So is it a good thing or a bad thing that consumers still don't know what a Soda Stream machine does? As an investor, this should sound an alarming bell that tells me the company has a huge market yet still available to the company and years of market penetration still ahead. In other words, Soda Stream is years away from market saturation as more and more consumers learn about Soda Stream and the benefits of the Soda Stream system. The Soda Stream system offers the consumer a healthier alternative to carbonated beverages offered by Coke (NYSE:KO), Pepsico (NYSE:PEP) or Dr. Pepper Snapple Group (NYSE:DPS). Soda Stream's flavored syrups have 2/3 less sugar, 2/3 less sodium and 2/3 less calories than the typical carbonated beverage drink from the major producers. With a Soda Stream system, in only a matter of a few months, the financial benefits will also be realized by the consumer as the per liter cost of soda through the Soda Stream system is dramatically lower than what is offered by the major beverage producers. Additionally, Soda Stream allows the consumer to blend flavors to suit ones particular tastes. If you like a lower carbonated drink or a more heavily carbonated drink, the Soda Stream also allows the consumer to adjust the carbonation level. Living in a bottle deposit state? No more bottle deposits with the Soda Stream system and no more lugging bottles home either from the grocery store.

With all these benefits and more, why do investors still see Soda Stream as nothing more than a passing fad? Well, it's clearly not a fad as indicated by the sales growth and slowing of attrition year-over-year. However, the stigma from failures in the home carbonation business model of the past still haunts the Soda Stream International of today.

Soda Stream didn't see success in the past for two reasons in my opinion; lack of convenience and timing. During the 80's, if you had a Soda Stream machine you probably had a very difficult time refilling your carbonator. There simply weren't many convenient locations for which to refill your carbonator. This lack of convenience resulted in large scale attrition for Soda Stream users. However, today a Soda Stream user can get their CO2 refill at thousands of retailers here in the U.S. and tens of thousands of retailers internationally.

Soda Stream's lack of success in the 80's could also be attributed to timing. The world very simply wasn't focused on conservation, water quality, pollution, recycling and overall health and wellness. Today, the world can't seem to stop focusing on these issues which become more and more relevant with each passing day. Carbon levels around the world are at record highs, landfills are near tipping points, recycling and reusing materials are increasing with frequency every year and living greener and healthier is the trend taking hold around the globe. The timing is perfect for Soda Stream to capitalize and cheerlead the growing sentiment of eco-friendly and healthier products around the world.

Soda Stream continues to execute its business model with extreme success as is evidenced by year-over-year results. As the company continues to dominate the product category through its vast distribution channel, first mover advantage, global brand recognition and library of patents which won't expire for another 7-10 years, depending on the specific patent, Soda Stream looks forward to 2013. At this time Capital Ladder Advisory Group will outline our expectations of Soda Stream's earnings, expansion efforts and operational activities going forward. Our outlook is based directly on market research and information gathered from industry experts. We will support our research disseminated in this article with conversational insights produced between Soda Stream International's management team and Capital Ladder Advisory Group.

Fiscal 2013 guidance for SODA will be outlined for investors during the company's 4th Quarter Earnings release in early February 2013. Based on historical guidance for this relatively young company, Capital Ladder expects Soda Stream to issue guidance showing earnings will grow between 25-30 percent for fiscal 2013. Should the company finish fiscal 2012 with earnings of $2.40-$2.45, representing roughly 50% growth YOY, this would peg fiscal 2013 earnings in the range of $2.90-$3.05 for fiscal 2013 using our expectation for guidance come February.

After three extremely robust years of growth, many feel that 2013 will prove to be the year that Soda Stream shows signs of slowing growth. I would tend to disagree with this argument that was originally presented by bear fund managers at the beginning of 2012. The bear argument sides with the belief that there are only so many doors left for Soda Stream to enter in existing markets. I think you can clearly see the fault that lies within this argument issued by bears in SODA.

In the existing markets, some of which have only seen expansion efforts in the last 12-18 months, Soda Stream still has plenty of doors for which Soda Stream can expand upon. In many markets Soda Stream has yet to enter the grocery and convenience store channel. The company recently entered Supervalu in Ireland as well as Wegmans and Giant Foods in the United States. The U.S grocery and convenience channel offers Soda Stream potentially 17,000+ doors to expand into for years to come. On a global scale, Soda Stream could effectively enter over 100,000 grocery and convenience doors over the next several years. I'm not seeing the legitimacy behind the bear argument based on these statistical facts and opportunities that could result in hundreds of millions of dollars for Soda Stream International.

Focusing on SODA's largest market, the U.S., Soda Stream had originally set expectations for grocery channel expansion in 2014. However, it looks like sell-out rates have greatly curtailed the original plans. It remains to be seen if Soda Stream enters some of larger national grocery chains in 2013, but investors should keep in mind that the company current sells products in Whole Foods Market store in New York and Whole Foods Market store in London, England. Soda Stream's Stevia based syrup line of products could be a huge development for Whole Foods Market stores to initiate distribution of this product offering in 2013 throughout its 330+ stores.

#

Pharmacy Chains

City

State

Pharmacists

Stores

1

Walgreens Corporate Office

Deerfield

IL

10,578

5,274

2

C V S Corporation

Woonsocket

RI

10,151

6,288

3

Dominick's Finer Foods

Pleasanton

CA

888

719

4

Rite Aid Corporation

Camp Hill

PA

5,523

4,608

5

Kroger Company

Cincinnati

OH

1,866

1,156

6

Publix Pharmacies

Lakeland

FL

835

710

7

H.E.B Drug Stores

San Antonio

TX

315

191

8

Stop & Shop

Quincy

MA

303

235

9

Winn-Dixie Pharmacies

Jacksonville

PA

461

390

10

Giant Eagle Pharmacy

Pittsburgh

PA

403

187

11

Fred Meyer Pharmacy Division

Portland

OR

276

127

12

Smith's Food & Drug Centers Inc

Salt Lake City

UT

268

132

13

Shoprite Supermarkets Inc

Florida

NY

236

153

Just to book end this chart, we would also like to note that Supervalu has over 2,500 locations in the U.S. and Safeway has almost 2,000 stores in the U.S. and Canada for which we could see Soda Stream products on the shelves one day. Capital Ladder Advisory Group expects to see a distribution deal with one or two of the aforementioned grocery/drug store chain retailers in 2013.

So let's ignore all the statistical information and chart which outlines further growth opportunities ahead for Soda Stream and work under the guise that, in existing markets, the door growth will be limited as the bear case suggests, thus limiting revenue and earnings growth for SODA. The bears call it "chasing doors" and suggest that eventually you will catch all of them; and then what? Well the proof is in the pudding as they say and Daniel Birmbaum in accordance with results from NPD says it best when they describe sales growth in existing doors as growing at a high double digit rate YOY across most existing doors selling Soda Stream products for at least 12 months. The most prudent analysis, based on the overwhelming evidence, suggests that the company will continue to grow revenues and earnings for the foreseeable future at a healthy pace. However, bears with short speculative positions ignore presented facts and speculate for possible downside as is well known.

Now let's turn our focus to even greater opportunities for Soda Stream International in 2013. Soda Stream has already outlined to investors three very large market expansions set to take place next year. India, Mexico and China are all slotted for expansion alongside Greece, and as has been suggested by Capital Ladder Advisory Group, Argentina and possibly Poland. India, Mexico and China are three very large markets for consumer goods and the consumption of carbonated drinks. These markets will provide Soda Stream with 3 large pipeline builds (sales) during the course of fiscal 2013. If we are analyzing pipeline builds YOY, in 2012, Soda Stream had one large pipeline build which wasn't even a country. This pipeline build was Wal-Mart in Q2 2012, which one could argue was the size of an entire country pipeline build outside the United States. So this is our measuring stick so far as pipeline builds; one large pipeline build in 2012 and the potential for three large pipeline builds in 2013.

With regards to India, Soda Stream will likely expand into the region during the first quarter of 2013 should all go according to plan. This has been a long time coming for investors and it seems as if all the pieces are in place as the company has partnered with a regional producer and laid most of the infrastructure to do business in the nation.

One case that has been made by bears over the course of the last year is that Soda Stream has no cash. Not exactly true as the company has over $50 million in cash and cash equivalents on the books currently. The company still plans to be cash flow positive for the balance of 2012, but understands the value of doing that which is right for the business' long term success, such as it did by purchasing the Canadian Soda Stream assets in Q3 2012 for roughly $4 million. The company has seen the strong YOY success in the Canadian market and will benefit from higher margins buy owning this market outright.

Moreover, this strategic acquisition of the Canadian assets fits right in line with Soda Stream's goals for 2013 which are directly related to the Americas. With the United States being Soda Stream's largest and potentially most profitable market, within this market there is the opportunity to increase net profits through manufacturing. So what does this mean?

In the United States, Soda Stream users consume nearly triple the amount of soda-flavored syrups than the rest of the world. With the bulk of Soda Stream's manufacturing occurring outside of the U.S., the company would benefit by producing syrups in the U.S. for the Americas region. And so that is exactly what Soda Stream has planned to do and foresees in 2013. Based on talks with Soda Stream's Corporate Director of Communications Yonah Lloyd, it appears as though Soda Stream has entered into talks and a potential partnership with a well established manufacturer in the United States whom will produce syrups for Soda Stream in 2013. When this announcement is made and manufacturing of syrups commences next year in the U.S., this development could greatly increase profit margins for goods sold in the United States. This development also demonstrates how the company can further grow profit margins and earnings going forward. What remains to be explored by analysts and investors is the naming of this manufacturing partner; who will it be?

Capital Ladder Advisory Group could easily make the case that it could be a large compounded deal with a big beverage producer like Dr. Pepper Snapple Gorup who has manufacturing in Texas. DPS recently signed a licensing deal with Green Mountain Coffee Roasters (NASDAQ:GMCR) to sell Snapple K-cups for Keurig brewers. This demonstrates the desire for Dr. Pepper to find alternative revenue channels for its large portfolio of brands such as Dr. Pepper, Venom, Clamato, A&W, 7UP, Crush, Hawaiian Punch and Schwepps. Where Soda Stream could offer a new revenue stream for Dr. Pepper's brands of beverages, Dr. Pepper could offer Soda Stream manufacturing in the United States. This could be a perfect partnership. However, on that same note, there are hundreds of manufactures to choose from in the United States and what is most important for Soda Stream is collaborating with the right manufacturer that will be able to increase profit margins for the company. Based on the lack of communication regarding this development we would argue that most of the analysts covering Soda Stream have not factored this into their projections for next year.

As the leader in the home carbonation industry, investors expect Soda Stream to continue to advance the product line and technology for the industry. Investors haven't heard much about the Aqua Bar lately have they? The Aqua bar, created by Italian designer Stefano Giovannoni, dispenses purified and filtered sparkling, hot, cold and ambient water. The Aqua Bar is a plumbed-in, plugged-in counter-top machine that caters to a full range of home water needs . The Aqua Bar is the advancing technology of a widely used home "water bar" that exists in many European households today. The Aqua Bar will be launched in early 2013 for the European market and will likely expand its market presence later in the year. The Aqua Bar technology takes the typical water bar or purified water dispensers we have in the United States to a whole new level as it offers the ability to carbonate your water as well.

In addition to the Aqua Bar, Soda Caps are going to be more broadly distributed in 2013 as Soda Stream looks to patent this new syrup dispensing technology and create yet another barrier to entry in this highly evolving business segment. Look for more products to be launched by Soda Stream in 2013 and to possibly be on display in Chicago at the International Home and Housewares show which the company plans to attend in March. The IHH is a huge event for which Soda Stream has launched several products and signed retail partnership deals in the past. It is also where Capital Ladder Advisory Group discovered the deal that took place at the IHH Show between Soda Stream International and Wal-Mart (NYSE:WMT), ahead of the released announcement. Here is our letter to clients earlier this year outlining the events that took place during the IHH concerning Soda Stream and Wal-Mart.

Soda Stream will continue to dominate the home carbonation drinks industry and build the industry as it continues to spend money on advertising and promotion. The company has launched ad campaigns throughout the year and in various markets, but none have sent a clearer message to the consumer and the major beverage producers like the company's latest advertising campaign which launched earlier this month. If you haven't seen the commercial advertisement on air yet, here is the link http://www.sodastreamusa.com/.

In the UK, this same ad was recently pulled before the launch. Birmbaum had this to say in response to the ad being pulled off the air in the UK; "This decision is absurd, and the explanation given is totally unreasonable. Are we really being censored for helping to save the environment? This might be the first time in the world when an environmental approach has been shut down by the media to protect a traditional industry. Of course we're competing with bottled beverages, but why is offering a game-changing approach denigrating? It is like saying that iPod ads denigrate the Walkman or that car ads denigrated the horse and buggy. Clearcast's decision is disappointing and disturbing for any democratic society." In light of this recent decision by Clearcast, the advertisement still saw over 1 million page views on You Tube in the UK. It looks like Soda Stream is getting attention and PR regardless of what is thrown its way.

The clearest way to view this advertising and promotion is by analyzing it as a direct investment in brand recognition and awareness. By and large, the anecdotal response from the commercial can't be denied as anything short of positive. The sell-out rates at retailers since the commercial launched have added to the consumer's understanding of what a Soda Stream machine does. The consumers which had walked past a Soda Stream machine in the past, wondering why they might need one, now have a much clearer understanding.

Capital Ladder Advisory Group is seeing strong channel check results from a multitude of U.S. retailers such as Wal-Mart, Target, Costco (NASDAQ:COST) and Bed Bath and Beyond . Our data includes all store locations for each retailer. Should the retail investor wish to perform their own channel checks, in their local markets, that would be encouraged. However, another channel check which investors can utilize is amazon.com (NASDAQ:AMZN). Here is a link to discover the performance of Soda Stream on amazon.com.

For more information on Soda Stream and quarterly reports from 2012, feel free to visit us at capitalladders.com or contact us at info@capitalladders.com.

Source: Talking Soda