The recent roller coaster ride of SodaStream International (SODA) has been a lot like a child who has been given too much cola at a birthday party. Dizzying highs and sudden fits of upward energy have been followed by sudden drop offs in activity and the eventual (and inevitable) crash which included a stomach churning fall from $50 to $36 at one point. The most recent traded price of $40.10 represents something of a recovery to normal levels, but the question remains: is SodaStream ready to explode or is the fizz gone from the stock?
Unfortunately, like everything good in life... it will eventually come to an end. Hopefully, your stop losses were applied and you came out way ahead of the game. The fact that SodaStream's market segmentation is beginning to work against it doesn't mean that we can't profit from the outcome whether good or bad.
I believe that the stock will be volatile during the Fed's quantitative easing and perhaps will be better positioned for acquisition by a major like PepsiCo. With that being said, take it easy on the option premiums. Don't get greedy and by all means avoid slaughter. I recommend a covered call strategy, especially when it comes to the potential acquisition. Too bad they don't have any warrants for sale. ***
The Business Model
SodaStream is based on a pretty simple premise, which they themselves embrace as the “razor and razorblades” model. The phrase refers to the model pioneered by the Gillette razor blade company early in the 20th century with their disposable razors. The razor handle is the constant, and is reasonably durable with minimal need to replace it on a regular basis. The blade is the element that must be replaced regularly to ensure regular and optimum performance. In SodaStream's case the razor handle are the range of drinks makers.
The blades in this case are the range of consumable products that SodaStream provides for sale to operate the drinks makers. These come in three broad categories. The first is the simplest and cheapest, which encompass the range of syrups that customers can buy in order to flavor their drinks. The second are the carbonators that are used to add the bubbles (fizz) to the drinks. These are sold in the form of carbon dioxide canisters and are specifically engineered to fit different sized drinks makers. The final piece of the puzzle is the bottles that the company provides in order to house the homemade brews and cocktails.
The business model relies on a number of levers to drive customer demand, including health benefits of home made cola and drinks rather than additive and preservative laced commercial brands by industry behemoths such as Coca Cola and PepsiCo. Another differentiator is the environmental impact of the company, which proudly displays that they have saved the Earth from over 3 billion bottles going to landfill on their site. A final differentiator is the long held and time honored tradition of the celebrity endorsement, with the brand recently bringing Scarlett Johansson on board as their inaugural global brand ambassador.
The Financial Metrics
Despite the newly added star power of one of Hollywood’s most recognizable faces, the most recent earnings figures disclosed in early January did not impress the stock market. This was the catalyst for heavy selling of the stock, which saw the rapid fall from a strongly supported $50 to much lower $35 levels. The top-line revenue figure was a strong point, with incoming earnings of $562 million for the fiscal year ending 31 December 2013. However, despite the record sales figures, several factors contributed to the bottom-line earnings disappointing and falling well short of market expectations at $41.5 million.
The company highlighted that a extremely competitive holiday season in the United States with strong competition was a strong drag on performance. This is particularly so for a retail exposed company such as SodaStream (SODA) which draws a disproportionate amount of it’s earnings from the final quarter of the year. They also identified higher costs in providing their product coupled with lower prices on the shelf able to be charged as a result of heavy discounting, resulting in a margin squeeze from both sides of the equation. A final excuse was the adverse effects of foreign exchange rates, as the US dollar recovers from historic lows. Worryingly, these factors are not one off events, and are likely to represent continuing headwinds in the coming year.
The Investment Case
Retail is a tough landscape to play in these days, with the rise of online shop fronts, heavy competition and lower cost production and substitution. However, those companies that sell non-discretionary consumables are somewhat insulated from these forces. SodaStream sits somewhere in the middle, with soda an everyday item, but SodaStream’s products on the premium end of that scale.
Going forward, the companies success depends on leveraging strong brand awareness to drive sales of it’s drinks makers, and therefore create repeat business for it’s lower margin syrup and carbonation products. The company could draw on a page from the N’espresso playbook, which has been hailed as the best brand reinvention in a decade, creating a premium brand around the most everyday drink, coffee with effective branding. They also need to invest in new products to increase interest and curiosity in their consumers and complement their existing trademarked brands which include SodaStream, Soda-Club, Aquafizz and AlcoJet among others. Effective marketing strategies could also center around the environmental benefits of using the system as well as the health and cost advantages, all themes that are likely to play well in their major developed markets. Partnership with large brands helps deliver this message, as the recent tie-up with Samsung demonstrates, but it could take the attention of a truly global player to deliver these strategies, which is why it is rumored that drinks giant PepsiCo is considering buying the company.
SodaStream (SODA) is a differentiated product in the extremely competitive consumer goods and brands space. Addressing their contracting margins and increasing sales globally to offset heavy reliance on the US market are a priority for the company, and it remains to be seen whether they can do this on their own, or whether they will need the partnership or ownership of a larger player to deliver on these strategies.