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Crystal Clear Waters: SodaStream (SODA) Rollout Growth Story

December 1st, 2011 1 comment

Proven Track Record of Blowing out Street Estimates the Last 4 Quarters

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Source: Motley Fool (Link), Yahoo Finance

U.S. Store Rollout up More Than Triple-Digits Year-over-year to 9550 stores

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Source: Ad Age full article link

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1100 new Target stores, 1140 new Staples stores, 240 new Costco stores all rolled-out in the past month. The CEO was quoted on CNBC with Herb Greenberg that Walmart “is coming”. The CEO also said at J.P. Morgan conference on 11/30/11 “retailers like Trader Joes and Whole Foods.. You will start seeing things like that in the next year or so”

U.S. Store Growth led to Triple-Digit Sales Growth in Past and Likely the Future with Recent Store Add Acceleration of +45% q/q
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New Un-penetrated Countries Will Drive Years of Future Growth
SodaStream household penetration in Sweden is over 25% with several European countries in the range of 17-25%. Household penetration in the U.S. is negligible. The company just launched in Japan (press release link) in October 2011 and announced it will launch in Brazil in Q1 2012 (press release link). Changes in the corporate presentation also strong imply an upcoming launch in India (my analysis link).

CEO quote from J.P. Morgan conference 11/30/11 on U.S. business trends: “bottom-line sales are triple digit growth in the U.S. Consumables are going through the roof. So we are very excited about the prospects of a strong holiday and strong long-term growth in the U.S.”

It’s a Great Product that Saves You a Ton of Money
I use my SodaStream to make me sparkling water and soda about 3 times a day. If you drink sparkling water, buying a Sodastream is a no-brainer. Read my article (link) on how you can get an amazing 16.6 cents per seltzer liter. It also helps save the environment with less plastic bottles wasted (link), costs less (link), and is better for you nutritionally (link).

The following are some reviews on the Sodastream model I own – the Genesis. You can read all 46 customer reviews here: (Bed Bath Beyond link)

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Consumables Growth is Strong and Average Spend per U.S. Consumer Bodes Well for Future
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U.S. consumable growth is stunning (look above at CO2 refills y/y etc.). The CEO said on 11/30/11 that average spending per U.S. consumer is $65/year much higher than world-wide average of $34/year, which bodes well for the future as the U.S. is only 30% of SodaStream’s revenue and growing at triple-digit annual rates.

Awesome Business Model and Barriers of Entry
Not only does SodaStream make money up-front selling soda-makers, the awesome part of the business model is the 80% gross margins (DB analyst estimate) it gets from CO2 refill exchange canister business.

Along with the 9550 stores in the U.S. that sell SodaStream sodamakers, 50% of them (4785 stores) participate in the CO2 refill exchange business. Stores love this as it drives repeat customer traffic. This distribution network is a huge barrier of entry for competitors as stores are unlikely to offer a second CO2 re-fill brand at their customer service desks. Moreover SodaStream has 5 million CO2 re-fill cylinders in circulation manufactured at $10 a piece, which represents a significant capital investment. The CO2 re-fill valve is also patented.

In developed markets where there is well-financed competition such as Sweden, SodaStream still dominates at over 80% market-share due to its brand, first-mover advantage, and distribution network.

Europe Revenue Risk
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I believe the developed European market macro risk is over-stated. The developed markets in Europe (look above) are primarily 75%+ consumable revenue streams for SodaStream. Even if the macro situation worsens, it is high unlikely a family will cut down on $15 consumable CO2 re-fill every few months when in fact SodaStream saves them a ton of money vs. buying bottles. It’s a stretch to say any family will stop drinking sparkling water and go back to tap water to save that $15.

Europe growth has been overall strong, but even if it goes down to flat or single-digits, the triple digit growth in the U.S (already 30% of revenue) and new markets such as Japan and Brazil still give the company years of 20%+ growth runway.

Valuation and Short Interest
Most of Wall Street estimates for 2012 EPS are around $2.00 in USD earnings (Note Yahoo Finance estimates are in euros). Using the $2 number, the stock at today’s close of $29.85 is trading at 12.8Xs 2012 EPS ex-cash growing sales at 39% y/y in the last quarter.

Using the latest Nasdaq 11/15/11 short-sale data (link), short interest has increased 12% in the previous 2 weeks to 7,478,030 shares. That means roughly 54% of the float is short. High short interest to float numbers such as this have preceded massive short covering squeezes of 50-70% upward stock price moves in as little as 4 weeks (Examples: OCZ and BKS in the past 2 months).

Long-term annual targets
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Summary
I believe SodaStream is the best “early innings” rollout growth story in the market. They make a great product that saves people money and is a proven household penetration winner world-wide. 

The company has blown out Wall Street estimates the last 4 quarters, accelerated U.S. store distribution 100%+ y/y +45% q/q, launched in Japan in October, and will launch in Brazil in Q1 2012. For all these reasons including the CEO repeatedly being quoted on Bloomberg, CNBC, and at Wall Street conferences about being “very excited about the strong holiday” I believe it’s highly likely SodaStream will post strong Q4 results.

Moreover the company will likely give strong 2012 guidance of at least 20% revenue growth and EPS growth of 25% as the CEO repeats those long-term annual growth targets on a monthly basis and in corporate presentations everywhere he goes.

Research Links
1. Official company Powerpoint presentation September 2011 (link)
2. J.P. Morgan conference 11/30/11 Powerpoint presentation (link)
3. My metrics financial model spreadsheet (link)

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