The 'Retire Young Portfolio' Gets A Boost From SodaStream

A few days ago, I announced that I was making adjustments in the 'Retire Young' portfolio. There were three removals and three additions in the portfolio where Hewlett Packard (NYSE:HPQ), Smith Wesson (SWHC) and Wells Fargo (NYSE:WFC) were replaced with Microsoft (NASDAQ:MSFT), SodaStream (NASDAQ:SODA) and IAMGOLD (NYSE:IAG). Just two days after the adjustment, SodaStream crushed the estimates and the stock price appreciated by nearly 20% in the following two days. Indeed this gave our portfolio a boost, and it will make sure that we'll continue to beat the market by a large margin.

A couple weeks ago, when Pepsi and Coca-Cola denied the rumors that they were going to acquire SodaStream, the company's share price plunged from high 70s to mid 50s. Back then, I wrote an article saying that this is not a big deal because the company's solid growth rate still made it an attractive stock at the time. In the last quarter, we saw more proof of this.

The company earned $0.74 per share on revenue of $132.4 whereas the analysts were looking for $0.57 per share of earnings on revenue of $129.7 million. The company's revenue was up 28.5% compared to the same quarter a year ago.

While in the Americas region, revenue was up by 55%, Western Europe achieved revenue growth of 26% despite the deep recession the region is in. Furthermore, the company increased its guidance for the rest of the year and it expects to grow its revenues by 30% and EBITDA by 38% compared to the previous guidance, which forecast revenue growth of 27% and EBITDA growth of 36%. The company did really well in the last quarter and all the fears of investors were erased within 24 hours.

In the quarter, the company sold 935,000 soda market starter kits, up from 764,000 in the same quarter last year. The soda market starter kits generated $49.9 million in revenues, up from $39.8 million in the same quarter a year ago. The consumables generated $78.9 million in revenues, up from $61.6 million in the same quarter a year ago. The company's gross margin fell from 54.4% to 54.3%, which is a tiny movement and it still looks very healthy. The company's operating margin was up from 9.5% to 11.1%, which is another nice development. Since SodaStream outsources much of its manufacturing to contractors, it doesn't have a complete control on gross margins because it has limited control over production costs. Sales and marketing expenses as a percentage of revenues fell from 36% to 33%, mostly due to lower advertisement costs. In the second half of the year, the company plans to ramp up its advertisement expenditure by $8 million in order to take advantage of the holiday season in the western world.

The company's balance sheet suffered a little bit during the quarter despite strong results. SodaStream's cash shrank from $62.1 million to $35.2 million and its debt rose from nothing to $16.1 million. The company invested heavily in a new production facility, acquired its Italian distributor and added to working-capital during the quarter. Currently, SodaStream's working capital is $148 million, up from $95 million in December. The company's inventory rose sharply from $112 million to $143 million, but its acquisition in Italy played a large part in that.

During the conference call, the company's management continued to be as optimistic as ever. It reiterated the long-term goal of reaching $1 billion in annual revenues. According to the conference call, the company has a little over 1% penetration rate in the American market and it hopes to "double, or maybe triple" this figure in the medium-to-long term. SodaStream's management sees a lot of growth opportunities in the existing markets without having the need to enter new markets. During the conference call, it was mentioned that SodaStream could reach its $1 billion revenue goal without entering in any new markets simply by increasing its penetration rate in the existing markets.

SodaStream currently trades for a few dollars short of $70, which was my original price target. I don't want to sell this stock soon after adding it to the portfolio though, so I will just sell monthly covered calls to bring the breakeven price down. Currently, calls with a strike price of $70 expiring in September yield a premium of $2.70. Let's sell covered calls against our shares to bring our breakeven price further, or perhaps reward ourselves with a tiny "dividend" payment.

Meanwhile, our other additions to the portfolio haven't performed as good as SodaStream did. Microsoft is up from $31.45 to $31.67 since the addition, which is nearly flat. IAMGOLD performed badly as gold prices continued to slide. Since addition to the portfolio, IAMGOLD fell from $5.30 to $5.02. We can potentially sell covered calls to reduce the damage here, but I will just wait for the time being. IAMGOLD's share price has been and will be strongly correlated with gold prices and we will not see much of a recovery here until we see recovery in gold prices.

Disclosure: I am long SODA, MSFT, IAG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.