Two rapidly growing companies, Green Mountain Coffee Roasters (GMCR) and Soda Stream (SODA), have traded in tandem for the better part of a year, until most recently when Green Mountain Coffee Roasters reported a quarterly miss on revenue. GMCR fell nearly 50% on May 2, 2012, after it released its quarterly earnings results. Since then, it has continued its steep decline while Soda Stream has found some solid footing and is trading above its 200-day moving average. Soda Stream's most recently reported quarter, which was on May 9, 2012, showed both record earnings and revenue for the Israeli-based company. SODA also announced on its conference call that it had reached a retail distribution deal with Wal-Mart (WMT).
So let's see if we can parse out the differences between SODA and GMCR once and for all, keeping it simple of course. Firstly, if an investor were to take a broad look at the balance sheets for both companies the difference would be glaringly obvious. While GMCR has an abundant amount of debt on the books, SODA is debt free. Of course it is true that when companies are growing as fast as these two companies have over the last several years, debt accumulation is acceptable, yet SODA has none. Why you might ask? The answer is really quite simple as I promised I would keep it: Soda Stream makes money on its consumables line and its soda machine product line. This enables Soda Stream to achieve higher operating income and higher margins than Green Mountain. SODA has held quarterly margins above 50% for more than a year while GMCR's margins are in the 30s and have been for quite some time. Unfortunately, GMCR only makes money on its consumables and breaks even on its brewer machines and this is one of the contributing factors for the lack of free cash flow at GMCR. Just to belabor the point, GMCR has accumulated over $1.5 billion in negative cash flow over the last five years. No wonder it needs to dip into that credit facility every quarter. SODA has a credit facility also; let's be fair, most corporations do. Having said that, Soda Stream hasn't had to use its credit facility since the company went public in 2010. All of Soda Stream's expansion and innovation efforts are funded organically. Are we starting to see the differences?
Moreover, Green Mountain is spending hundreds of millions of dollars on a production build-out that will benefit the company's future profitability. As an investor in GMCR, my worry would be that as sales growth slows, as channel checks currently assume, and competition comes to the forefront, will its newer facility warrant the production capacity that the company is assuming it will need in the future. Soda Stream is also currently building its own new factory in Israel to facilitate the needs of this rapidly growing company. In sharp contrast to GMCR, quarter-over-quarter sales for SODA are accelerating. Let's be honest with ourselves for a moment here investors. The fact that many have chosen to ignore is that as an investor in either of these two companies, the earnings strength that you would hope to see reflected in a higher stock price isn't reflected because of the lack of cash on the balance sheets, hence the lower than average p/e ratio for such rapidly growing companies. Expansion and build-outs have to be funded folks and until the cash flow turns positive for either of these companies, you may not see dramatic gains in the price per share. Here comes the difference between SODA and GMCR. Soda Stream has stated, as of its last earnings release, that the company will be cash flow positive for Q2 and for the balance of 2012. GMCR has said that it will not be cash flow positive in 2012.
Let's talk competition now and see where the differences lie between these two growth stocks. GMCR's fiercest competition may have been created by GMCR. Its recent licensing deals with Starbucks (SBUX), Folgers and Dunkin Brands may be a root problem for the company's profitability going forward; at least this notion has been suggested by David Einhorn. Unfortunately, the latest channel checks may be proving Einhorn's theory of cannibalization as the Keurig branded k-cups are not growing as fast as the Keurig licensed k-cups from Starbucks. Just three short quarters ago, Starbucks k-cups were selling at a 1:10 ratio versus Keurig k-cups of similar flavors according to various channel checks. Now Starbucks k-cups are selling at a 1:8 ratio versus Keurig k-cups of similar flavors. Keurig also faces competition from a litany of other upstart single-serve coffee providers. Kroger has decided that the company will start producing its own single-serve pods that will work with Keurig and other single-serve brewing machines. Starbucks will launch its very own single-serve brewing machine called the Verismo this year. The Coffee Bean &Tea Leaf Company has begun its retail expansion in the U.S. earlier this year by entering stores like Target (TGT), Bed Bath &Beyond (BBBY), Macy's (M) and Dillard's (DDS). Unlike any Keurig machines on the market to-date, the CBTL machine offers a unique machine that can serve teas, coffees, and espresso drinks. Investors of GMCR have to wonder if this was the best time for the company to expand its manufacturing base when the threat of competition was more prevalent than ever before.
Soda Stream, well, by the company's own admission has no real threat of competition as of yet. Sure there is Primo Water Co. (PRMW), but it is nearing bankruptcy and has only entered a few retail establishments with limited results. In Europe, Viking Soda, which is a competitor to SODA, recently lost a patent infringement lawsuit filed by Soda Stream last year. Viking was ordered to pay SEK 1.09 million to Soda Stream and ordered to remove all Soda Stream trademark from the Viking Soda CO2 cylinders. Viking Soda was ordered to pay compensation for using Soda Stream's trademark as well as all Soda Stream International legal fees incurred. For SODA, it looks like it has created sound barriers for entry into this new market segment by way of patent protection that rolls through 2023 and being the first to market with quality products and strong leadership with a Harvard MBA graduate at the helm.
Next, these two corporations have differing distribution models. GMCR has, thus far, kept its distribution in North America while SODA distributes its products in 43 countries around the world. SODA is also looking forward to entering India and Greece in the early part of 2013 and should be able to advance in markets in Central and South America during 2013. GMCR has to get the ball rolling and expand beyond North America should it hope to continue its growth and sustainability long term. Given the overwhelming dominance and adoption of the Keurig single-serve system in North America, the company could easily expand its business model overseas. GMCR has to show investors that it recognizes the ceiling for market penetration in North America is ever closer and that the company is willing to expand its distribution on a more global scale.
Having global distribution and a lower tax rate may seem like a favorable characteristic for SODA, but having manufacturing and headquarters in Israel could prove to be too high risk for many investors. Israel is consistently under the threat of possible conflict with Iran and other countries in the region. GMCR is headquartered in the United States, and as such, this helps to garner more interest in the company and is just one of the main reasons GMCR has far more retail investor support than SODA.
We have looked at some of the considerable differences between these two companies, but there is still more such as tax rates, input costs and most importantly, operational execution. A lot has been made about GMCR's expiring patents. Certainly this has played a role in the decline of the share price, but if management had brought more innovative products to the market that met the demands of the market, and had done so in a timely fashion, this would be a mute point. It had taken GMCR nearly 3 years to come out with the Vue brewer, which comes with a hefty price tag and does little to separate itself from older models. SODA is barely into its second full year of market expansion in the U.S. and it will already be launching a series of new machines and flavored pods this year. The new machines and flavored pods will serve to advance the existing technology and address the needs of the market place. Management teams have to be innovative and execute in a rapidly changing environment.
If all this wasn't enough to prove that these two companies are very different, let's take one last look. SODA is a company that is deeply rooted in saving the earth from plastic bottles. The Soda Stream system also allows consumers to save money on carbonated drinks over time. GMCR has some roots in green conservation, but its Keurig system is one of the most expensive coffee systems in North America.
Considering that a 6 oz. K-cup serving costs .65cents ($1.30 for 12 oz., therefore), on average, they're nearly as expensive as buying coffee at the local coffee shop. Ok investors, you decide. Which is the stock for you?