Earlier this year I authored an article titled "SodaStream and Green Mountain Coffee, You Choose." The juxtaposition of the two companies offered investors the opportunity to discover similarities and differences in the companies and their respective business models. Ultimately, the article favored a position in SodaStream (SODA), but also factored in a thesis, which valued a possible investment in both companies as a part of one's long-term portfolio.
In the time period since the aforementioned article surfaced on Seeking Alpha, both companies have experienced dramatic headlines that have moved their respective stocks sharply in either direction. We've all seen the headlines for SodaStream and Green Mountain Coffee Roasters (GMCR). As we now look to bookend the year, let's quickly recap just a few of the headlines, which occurred during 2012 for both companies. Let's first start with Green Mountain as the stock fell dramatically in the spring months and rose just as dramatically in the last several months. For a more complete look at press releases from GMCR click here.
- December 3: Green Mountain appoints former Coca-Cola Refreshments executive Brian Kelly as new CEO. Mr. Kelly formerly held the position of President of North America Business Integration for Coca-Cola and was to be the President of Coca-Cola as of January 1, 2013.
- November 8: In partnership with Luigi Lavazza SpA, Green Mountain announces the introduction of the Keurig® Rivo" Cappuccino and Latte System.
- November 1: Green Mountain announced it is the exclusive manufacturer of Costco Kirkland Signature" brand K-Cup® packs for the Keurig ® single cup brewing system.
- October 9: Green Mountain Coffee and Dr Pepper Snapple Group (DPS) announce the companies have reached an agreement to offer Snapple® premium iced teas in K-Cup® and Vue® packs for Keurig® single cup brewing systems.
- September 12: Green Mountain Coffee announces the commercial expansion of its newest single cup brewing system, Keurig® Vue®, a premium new platform designed with the ability to brew stronger, bigger, and hotter, and now smarter with RFID (radio frequency identification) technology.
- May 2: Green Mountain Coffee and Eight O'Clock Coffee Company announce the companies have reached a multiyear agreement to make Eight O'Clock® coffee, Tetley® tea, and Good Earth® tea available in K-Cup® and Vue™ packs for Keurig® Single Cup Brewing systems.
- February 15: Green Mountain Coffee announced the expansion of its line of Keurig® Single Cup Brewers with the addition of the Keurig® Vue™ brewer.
Now let's take a look at some of the headlines from SodaStream International as the company embarked on large-scale expansion efforts in 2012. For a more comprehensive view of SodaStream International's press releases in 2012 click here.
- December 4: SodaStream announces Its First-Ever Super Bowl Commercial. SodaStream's Super Bowl ad is scheduled to air during the fourth quarter of the game when people are most likely to notice the growing piles of bottles and cans strewn about the room and filling up their trash.
- November 12: Campbell Soup Company (CPB) and SodaStream International, Ltd. announce an agreement to license Campbell's V8 Splash and V8 V-Fusion brands for the SodaStream home beverage carbonation system.
- October 18: SodaStream announces that its products are being made available in Russia, Chile, and Singapore, through new exclusive partnerships.
- July 18: Kraft Foods, Inc. (KFT) and SodaStream International, Ltd. announce the expansion of their strategic partnership for the manufacturing, marketing, distribution and sale of Kraft Foods beverage brands for use with the SodaStream soda making system. The initial Kool-Aid flavor choices will be Cherry, Grape and Tropical Punch.
- June 4: Breville Pty Limited and SodaStream International, Ltd. announced a strategic partnership aimed at further expanding the home carbonation category. The jointly developed soda maker is expected to be available at retail in 2013.
- April 16: SodaStream International, Ltd. announced the introduction of SodaCaps and the Source at the annual Salone del Mobile in Milan, the largest design fair of its kind in the world.
- March 12: SodaStream International, Ltd. announced the introduction of the Revolution, a new, innovative soda maker with breakthroughs in both function and design.
- March 5: SodaStream International, Ltd. announced the launch of a line of flavors sweetened with Stevia, an all-natural plant-based sweetener.
While this list of press releases was offered to the investment community, of course there were additional headlines that affected both stocks greatly in 2012. Green Mountain Coffee shareholders endured a litany of headlines related to competitive threats from private-label grocery retailers offering their very own k-cups and coffee pods. Additionally, GMCR shareholders were held captive to Starbucks (SBUX) headlines, which pinned the two companies in direct competition despite their existing partnership. Starbucks launched its own espresso and coffee flavored beverage machine named the Verismo. Speculators portrayed this venture by Starbucks into the small appliance category as the beginning of the end for its partnership with Green Mountain Coffee in spite of comments from Howard Schultz, CEO of Starbucks who advised the investment community that Starbucks will continue to supports its partnership with Green Mountain Coffee.
GMCR shares have been on a roller-coaster ride all year long as disappointing quarterly results produced a dramatic share price decline in May. During the company's Q2 2012 earnings call on May 2, GMCR was forced to lower full-year guidance as sales growth was slowing in the face of increased competition and operational headwinds. The company outlined measures it would take to streamline operations and improve capacity utilization in joint efforts to better forecast demand. Shares of GMCR fell almost 50% on May 3, as investors quickly rushed for the exit doors. The stock continued lower throughout much of the subsequent quarter, reaching a 52-week low of roughly $17 a share before rebounding in August, after the company released its Q3 2012 earnings results and announced a $250 million dollar buyback plan. There's nothing like a strong buyback plan to scare off some short speculators.
Shares of GMCR also benefitted from greater analyst coverage in the second half of 2012 with new analyst coverage. Lazard's Matthew DiFrisco began coverage of GMCR with a buy rating and a target price of $39 a share on September 7, and shares of GMCR rose nearly 10% on the day. Most recently, Lazard raised its price target for shares of GMCR to $45 a share; Canaccord Genuity lifted its 12-month price target to $45 from $39; SunTrust went to $45 from $40; Keybanc raised its target to $45 from $36; and Roth Capital went to $40 from $35. According to Canaccord analyst Scott Van Winkle, "a vastly improved inventory situation from a year ago and a turn to positive free cash flow takes the trends from good to very good."
So what's next for Green Mountain Coffee and its shareholders come 2013? It's hard to say as no definitive trend currently exists for the company or its shareholders. Operational missteps and faulty forecasting of demand, not to mention margin contraction have resulted in great volatility during 2012. Many investors are looking forward to an increased user base going forward and possibly international expansion efforts in 2013. On October 16, 2012, Green Mountain Coffee named Gerard Geoffrion, the man who ran Green Mountain's Canada unit, as the company's president for international business development.
The question with regards to international expansion is whether or not the company can succeed on this elevated level. The company's margins are already razor thin, no pun intended toward the "razor blade" business model employed by the company. While I can certainly appreciate the company's efforts to manufacture in the United States, it is perplexing as to how the company will expand internationally knowing that in order to do so it will likely have to add a distributor network of partnerships, which will effectively reduce margins even further. The current manufacturing operations simply won't work for international expansion and is the most telling reason for Green Mountain Coffee's confinement to North America over the last several years. So will Green Mountain Coffee manufacture goods outside of North America in the future? The company's current relationship with Luigi Lavazza may prove noteworthy in this regard as GMCR and Luigi Lavazza have produced the latest Rivo espresso machine together. But, production and distribution are effectively two very different beasts and it remains to be seen as to how this partnership will develop moving forward. At the end of the year it all comes down to one thing as an investor; how did my investment perform. Year-to-date, GMCR shares are down roughly 12 percent.
So let us now move on to SodaStream and review how shares for this much maligned company have fared in 2012. While shares of SODA have seen their fare share of volatility and probably more than is appreciated by shareholders, the company has seen phenomenal year over year results. With net profits growing at roughly 50 percent YOY, the company has outpaced its original 2012 guidance, which forecast net profit growth of 28 percent. In spite of this stellar performance, many still claim the company's product line is nothing more than a fad. Shareholders of SODA feel the fad theory is without merit as there are not too many fads in the consumer goods category, which offer so many value added benefits for the consumer. While the SodaStream product line is fun to use, it also saves the consumer money; it helps save cupboard space; it is very eco-friendly and doesn't even require recycling; it is a healthier alternative to the leading carbonated beverage producers; and the product line allows the consumer to customize carbonated drinks of choice. It's hard to find another consumer good with this many added benefits and the plethora of benefits should prove as evidence for the accelerated adoption of the product line by consumers and dissuade fad theorists. But fad theorists will always lay claims as even a couple of SodaStream's analysts feel the company's products are faddish. For the sake of relationships, these analysts will not be named here.
SodaStream effectively launched its licensed Kraft Food branded syrups earlier in the year. The partnership between the two companies is going better than either company could hope for, and as such, in July, the two companies expanded their partnership to include Kraft Food's Kool-Aid brand flavored syrups, which hit Wal-Mart stores in late November. On SodaStream's recent Q3 Earnings conference call, CEO Daniel Birnbaum noted that Kraft Food brand syrups had accounted for roughly 25% of syrup sales in the U.S during the quarter.
Breville Party LTD joined the SodaStream licensing parade this year and the agreement will see a joint venture in which Breville will produce a soda machine that will be powered by SodaStream's CO2. While some may feel a machine produced by Breville will curtail SodaStream machine sales, Capital Ladder Advisory Group data has shown otherwise as Cuisinart recently introduced its own soda machine that has only enhanced the product category and boosted consumer awareness and sales for SodaStream. What is most important with regards to the Breville licensing agreement is that there are some retailers that haven't adopted the SodaStream product line, however, these few retailers do sell Breville products. By way of Breville's retail distribution partnerships, SodaStream with thus benefit from Breville sales through CO2 usage.
Our last licensing partnership for SodaStream came in November as Campbell Soup Company and SodaStream International, Ltd. announced an agreement to license Campbell's V8 Splash and V8 V-Fusion. As the beverage industry sees greater competition and consumer behavior changes, beverage companies are looking for alternative revenue streams and alternative ways to get into the consumer's household. We should see V8 flavored syrups for SodaStream in stores early next year.
SodaStream continues to expand its global distribution footprint and effectively entered new markets in 2012 while growing mature markets. France, Germany, Japan, North America, Ireland, Australia, and the U.K. all saw dramatic YOY growth in sales and retail doors. Consumer retention has also strengthened internationally for the company as branding and marketing efforts have proven effective. Most recently, SodaStream launched a commercial advertising campaign in the United States and the company has committed to a 4th-quarter Superbowl commercial. In 2013, SodaStream will look forward to entering more new markets such as India, Mexico, China, Greece, and possibly Argentina. There are some very big markets named here and identified by management as key opportunities for the company. Be aware Coca Cola (KO) and Pepsico (PEP), SodaStream is coming to a market near you.
In 2012, SodaStream has been forced to recognize that the American consumer is different in its consumption habits from other consumers around the world. The average U.S. consumer buys more than twice the amount of flavored syrups than in any other region. With this data presenting itself to management, the company is dedicating efforts to produce its flavored syrups, destined for North America, in the United States next year. In order to do this, SodaStream is seeking a partner with manufacturing expertise. The manufacturing partner will not be named until next year, but with soda caps coming to the U.S. next year, could Green Mountain Coffee be the expert manufacturer SodaStream is looking for? Soda caps are very similar to k-cups manufactured by GMCR. One thing is for certain, with flavored syrup sales growing at an alarming rate in the U.S., SodaStream won't have any difficulty finding a partner.
In 2013, SodaStream will have some new objectives to accomplish as the company's user base grows by leaps and bounds. The company hopes to begin manufacturing capabilities at its newly developing manufacturing plant in the second half of 2013. By 2014, this new facility will serve to dramatically improve the company's manufacturing capabilities and profit margins. With gross margins already above 50 percent in each of the last seven quarters, imagine where gross margins will be when full operations at the developing manufacturing plant commence. Oppenheimer's Joseph Altabello sees this manufacturing development as a real driver for even greater profitability going forward for the company and maintains a $50 price target for shares of SODA. Moness, Crespi & Hardt's Jim Chartier believes SodaStream can continue its growth over the next several years and states in a recent research note to investors that SODA could earn up to $10 a share in the next few years with $4 a share coming from the U.S. alone.
With strong fundamentals and increased global demand, SodaStream is poised for continued success in 2013 and as the company continues to innovate. New product offerings at retailers are seeing very strong sales in the early going and the company's mix of products allow retailers to price competitively and grow sales in the product category. As the company introduces new products, its goal will be to expand its shelf space with retail distribution partners. Capital Ladder Advisory Group looks forward to seeing how 2013 plays out for SodaStream International LTD. As I stated earlier, at the end of the year it all comes down to one thing as an investor; how did my investment perform. Year-to-date, SODA shares are up nearly 27 percent.