Green Mountain Coffee Roasters (GMCR) and SodaStream International (SODA) are currently sporting a trailing P/E multiple of around 16 depending on the given day. Some days or weeks it is a little higher and usually during the forth quarter both stocks sport a P/E multiple around 20 just as they did this past year. I am grouping the two stocks together because if one looks at the P/E for both companies over the last 12 months they tend to pull together like a magnet. Sure they drift apart from time to time, but they seem to always come back together.
Just recently, both stocks saw a rapid share price appreciation during Q4 2012. Both P/E rose to 20 with SODA climbing even higher in anticipation of strong Q4 2012 results. Upon Green Mountain's Q1 2013 earnings release on February 6, 2013, shares of GMCR fell sharply as investors were in a "take profits" mood. Strong quarterly results and mediocre guidance served as a catalyst for profit taking in the eyes of many investors.
How very convenient that after a bout of quarterly profit taking in shares of GMCR, shareholders of SODA did the exact same thing following the companies' Q4 2012 earnings release on February 20, 2013. Nearly the same results that were offered by GMCR's quarterly report were offered in SODA's quarterly report, both strong beats on the top and bottom line. Oddly enough, SODA sold off in much the same fashion and to much the same degree on a dollar basis that GMCR sold off.
SODA closed the day before earnings at a 52-week closing high of $52.44 a share, a meteoric rise that began in the after hours trading session on November 28, 2012, when GMCR reported its Q4, 2012 results. This PPS appreciation lasted for nearly 4 months. I hope investors are starting to pick up what I'm putting down? GMCR's unexpected strong Q4 2012 earnings results spurred both stocks higher. Upon GMCR releasing its Q4 2012 earnings results, shares catapulted from nearly $29 a share to over $49 a share over the next three month period and as noted already, shares of SODA followed in lock step.
As one can clearly see in the 6 month chart overlay, these two stocks follow each other very closely while the degree of the peaks and valleys occur in differing degrees, they occur at nearly the same time. This means one thing and one thing only. The two stocks have the same institutional investors in surplus. To dismiss such analysis wouldn't be prudent as will be further evidenced in this article.
I have taken the time to introduce this analysis regarding the SODA and GMCR P/E multiple and tandem stock movement most recently on different web message boards such as Yahoo Financial Message Board (YHOO) and Stocktwits. Many who follow my analysis on SODA and GMCR saw yesterday that the two stocks came as close to sharing the same P/E as they have in the last 3 months.
As Capital Ladder Advisory Group provides coverage of both GMCR and SODA, we have tracked institutional shareholder ownership over the past several years. On many occasions we have seen hedge funds and institutions weave in and out of GMCR and SODA on a reoccurring basis. Some funds will take a position in both stocks for a given quarter or just one stock and then sell out of that particular stock upon the quarterly release date and take a position in the other stock. It has been happening like clockwork over the last 2 years and to a greater extent in 2012.
Institutional and hedge fund players alike view these two companies very similarly. They both employ the same "razor/razor blade" business model in which they sell a machine in the hopes that they can continue to sell consumables that are intended to be used for that machine. However, the similarities between the two companies tend to terminate at that point. GMCR sells its product largely in North America while SODA sells its products in over 45 different countries. GMCR's gross margins are in the low-mid 30s while SODA's gross margins are in the mid 50s. GMCR has over 220 coffee and tea flavored K-cups while SODA has 150. SODA has manufacturing capabilities in 7 different countries outside of the United States while GMCR manufactures within the United States. GMCR has an extensive library of licensing agreements while SODA, to date, has only 5 such licensing agreements. SODA products are actually a cost saver while GMCR products are usually pricey but with respect to like channels of distribution. The list of differences far outweigh the number of similarities, but when speaking with various hedge funds they seemingly care little to recognize the differences. The following exert is from a conversation our market research analyst Martin Costa partook in with a hedge fund currently holding several thousand shares of both SODA and GMCR. The hedge fund manager's name and association has been kept private as agreed:
Martin: When you analyze these two stocks, where do you see the differences?
HFM: There aren't as many as investors assume. With a razor/razor blade business, the razors are usually very expensive, so they can only reach so much of the market. There's a limit to how much market share they can capture by sheer cost of the razor blades. I agree there are underlying differences, but they may not be that significant in the grand scheme of things.
Martin: So are you depicting an end game or a ceiling in your investment thesis?
HFM: You have to. We aren't saying when it will happen, but eventually it does with this particular business model given pricing.
Martin: Who is most at risk of reaching that ceiling in the future? What are you looking at so far to identify this?
Hedge Fund: It's basic speculation, but you'd have to say Green Mountain. If they don't find a profitable way to get beyond the U.S. then what do you have?
Martin: Are you of the opinion they can?
HFM: No, not given their gross margins. Where are they gonna find a manufacturer centrally located, let's say in Europe, that can build and ship Keurigs to the region with any profit margin?
Martin: So why invest in SODA or GMCR if you feel there is only so much growth?
HFM: Anything can happen and a ceiling may not be reached for years. Right now earnings and revenues are growing, you can't ignore this to speculate on when the downturn will come. What if they mergerwith a conglomerate or get bought out or tomorrow announce another deal?
Martin: And SODA, at least with GMCR, they are home-grown and without threat of regional conflict. Wouldn't you see more cons in SODA than GMCR?
HFM: On the contrary, SODA has much more room and years of growth ahead. It's an early stage play on GMCR for those who missed out on GMCR in 2009. Regional conflict is part of the risk with SODA, but it's almost always noise. They have never had a shut down or anything like that. You want a con for SODA I'll give you one; it's a soda machine and its not a coffee machine. I wake up in the morning and have a cup of coffee like millions of people around the world. We don't wake up and have a glass of soda. Some people physically need that cup of coffee.
As investors can see from the exert, while there are many differences between the two companies, they tend to take a backseat as the business model employed by SODA and GMCR ride up front. Let's be honest though, not all hedge funds are created equally and not all hedge funds analyze data and business operations correctly or objectively.
Finally, with regards to SODA and GMCR share price and P/E multiple similarities, let's take a look at just how many hedge funds and institutions both owned these stocks as of 1/31/13. Keep in mind that GMCR has nearly twice the amount of institutional/hedge fund participation as SODA. As a function of this factoid, the analysis should be that GMCR has more impact on shares of SODA than SODA has on shares of GMCR. Remember, many institutions play the stocks together, so if they sell or buy positions in one for any given reason they are likely selling or buying positions in the other.
List of Common Shareholder:
Alydar Partners, American International Group (AIG), Bank of America (BAC), Ameriprise Financial, Brown Advisors, BTIM Corp., Boston Advisors, BMO Capital, Barclays (BLC), Bank of New York Mellon (BK), Blackrock Group (BLK), Capstone Investment Advisors, Credit Agricole, Citigroup (GM:CITI), Citadel (OTCQB:CDFT), Credit Suisse (CS), D.E. Shaw, Essex Investment Management, FMR LLC, Goldman Sachs (GS), Group One Trading, Guggenheim Capital, Hightower Advisors, Invesco LTD., Janney Capital, Jane Street Holdings, Jeffries Capital mgmt. (JEF), Knight Capital Group (KNT), Lord Abbett &Co., Maplelane Capital, Nomura Holdings (NMR), Northern Trust Corp. (NTRS), Oz MGMT, Parallax Volatility Advisors, Peak6 Investments, PNC Financial (PNC), Royal Bank of Canada (RY), Russel Frank, Spot Trading LLC., Shapiro Robert, Timberhill LLC., Tremblant Capital, Two Sigma Advisors, UBS AG (UBS), Walleye Trading, Wells Fargo (WFC) and Whitebox Advisors.
Noted above are 47 companies which held positions in SODA and GMCR through Q4 2012, a majority of which still hold positions in both companies. Here's where it gets trickier for SODA shareholders. As of 1/31/13, the number of registered institutional and hedge funds participating in SODA were 158. As of 1/31/13, the number of registered institutional and hedge funds participating in GMCR were 286. Given the disproportionate numbers in institutional participation between the two respective stocks, one can see why GMCR has a greater adverse affect on SODA than the other way around as we consider like institutional/hedge fund participation.
In closing, the charts, institutional ownership and P/E similarities point to the notion that if you own SODA, you adversely own GMCR, so it's best to keep both stocks on your watch list and be apprised of both companies' operations, headlines and quarterly results.
Additionally, on February 27, 2013, SodaStream announced its newest partnership with Ocean Spray Cranberries, Inc. the leader in cranberry based beverages and foods, to license a portfolio of juice blend concentrates co-developed exclusively for the SodaStream home beverage carbonation system. Ocean Spray Cranberry drinks are distributed throughout North America by Pepsico (PEP). I would speculate that we will see a similar headline in the near term related to GMCR as the company continues to broaden it efforts in the marketplace and increase its licensed and wholly owned products.