With SodaStream (NASDAQ:SODA) sitting near all-time lows and a prominent investor presenting the long thesis again, the stock is worth investors taking another look. Whether investors agree with a bullish case for the struggling manufacturer of home beverage carbonation systems, anytime a prominent investor takes the time to spend this much effort on one stock some noteworthy points must exist. Even more potentially alarming for investors short the stock, the investor placed a conservative price target on the stock roughly double the current valuation.
The question is whether the thesis has any teeth and the following analysis will cover the key takeaways from the presentation.
Whitney Tilson Thesis
Back at the end of October, Whitney Tilson of Kase Capital released a 32-page powerpoint that his firm was still bullish on SodaStream and had in fact added more shares to the portfolio. The report was just released on Seeking Alpha and grabbed a lot of attention with over 70 comments in just a week after posting.
The thesis in the presentation has a couple of main themes as follows:
- The home beverage business is not a fad.
- Western Europe business is worth more than the current market cap.
- CO2 refill business is worth more than the current market cap.
- North American market is the wild card.
The key to the thesis is that the home-beverage business is not a fad due to the long-term success in Western Europe and customer surveys performed by his firm. The real wild card is the lack of execution in the U.S. market and poor inventory management that has substantially impacted results.
It is interesting that the presentation makes the claims that the stock isn't cheap, though using the numbers presented SodaStream only trades at roughly 12.4x 2015 earnings. Note these numbers were more inline with estimates back in October that are significantly lower now. The average analyst estimate has dropped from the listed $1.68 to only $1.32 now.
Source: Kase Capital presentation
Even more interesting, Whitney Tilson makes the case that earnings would surge if the company cut the high-level of sales and marketing expenses. According to the analysis, earnings per share would surge $0.87 based on each 10% reduction in that expense line. A 40% reduction in sales and marketing would lead to a substantial surge in annual EPS to $4.22. SodaStream would still spend $112 million in annual sales and marketing expenses.
Source: Kase Capital presentation
The stock has hit a downward slope ever since hitting over $75 in June 2013. It now sits virtually flat with when Kase Capital produced the SodaStream presentation and bought more shares in the low $20s.
The thesis backs some of the points by Stone Fox Capital in the past. The typical U.S. based investor doesn't understand the solid Western Europe business that justifies the current valuation alone. The company has solidly profitable business lines in Western Europe and the C02 refill business. The big issue is the large amount of sales and marketing expenses incurred in order to build out the failing U.S. business. Clearly SodaStream would become more profitable by reducing the sales and marketing spend in the U.S., but it would lose that potential business opportunity.
The valuation is attractive so it isn't hard to disagree with Whitney Tilson on the price target. For new investors though, one doesn't need to be aggressive on the stock until it breaks the downtrend. It could break out next week with the potential positive news from Pepsi (NYSE:PEP) on the sodacaps or if the stock doesn't hold $20, the stock should be avoided.
Disclosure: The author is long SODA.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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