On June 6th, at an investor conference in Hong Kong, a hedge fund gave a presentation highlighting SODA as an investment idea, but not just because of valuation or a takeover. They pointed out that the SodaCap product allows the soft drink makers to sell their syrup direct to consumers. One of the strengths in margins over the years has been the business model of selling syrup to bottlers, and the companies removing themselves from the costly process of transporting large amounts of final product direct to store shelves.
Prior to the development of the SodaCap, a consumer would have to manually add syrup directly to the bottle of water prior to making their drinks. This would never be a system that the large beverage companies would tolerate. Even at McDonald's, Coca-Cola (KO) carefully calibrates machines to ensure uniform taste. With the SodaCap, they could be in control of the taste.
In addition, they show that it is not just the at home soda phenomenon that could drive sales. The anti-bottle, anti-waste movement appears to be picking up speed. It would appear that certain cities, such as San Francisco, could ban plastic bottles entirely. This would leave many consumers or restaurants needing to do on-site preparation. That's fine for restaurants that have soda fountains, but problematic for at-home consumption.
Major beverage companies are quick to respond to preserve brand image. They responded swiftly to public sentiment on obesity, and would easily respond if the noise got louder on the environment. If you think about how much they would spend on brand image, all the press that could surround an environmentally friendly tie up or purchase of SODA would be less costly than the billions they could spend defending their image.
Clearly, PEP and KO and going to have to pick a side on the plastic bottle debate. Unlike most green initiatives, selling syrup directly to the consumer could actually be more profitable, as long as you can control the portions so that Coke at home tastes just like in the store. I am sure Starbucks (SBUX) performed rigorous tests prior to coming onto the Keurig platform. Moving to home soda is good for their brands and good for the bottom line.
According to the presentation, selling syrup directly to even a small group of consumers could boost Coke's EBITDA margins by 2-3%, which would be highly beneficial for earnings. Previous speculation about a buyout has not included discussion of direct syrup sales. The full presentation is available here.
I am long SODA because I believe that this type of tie up could add a lot of sales, potentially in excess of what the company has forecast. With this kind of acceleration in growth, the famous $100 price target from Barclays would be very achievable. It would put the company on roughly 10x 2016 P/E, which is not that rich for the sector. You would need to believe in the growth in order to get there, but there is a decent margin of safety since 2016 multiples for major beverage companies are still higher.