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-take honor from me and my life is done
-always put forth maximum effort
-you’ve got to play on
-be sure you’re right, then go ahead
-you can turn enemies into friends
-we need to build bridges with each other
-use your influence for good
-grit your teeth and make a come-back
-challenge your heroes
-set your goals higher than you can achieve
-rewrite the rules
-you’ve gotta have hope

Source: Oprah’s Master Class

Although I’m a bigger fan of reacting to important fundamental inflection point news AFTER the fact rather than making decisions on far off in the future predictions, I do find it useful to crystallize my current leanings and thoughts. As always I reserve the right to change my mind at any time as new data-points are released. Here it goes:

1. After some volatility in January from macro headlines in Europe, SodaStream stock will sky higher in the first half of 2012 on spectacular quarterly financial results in February and May. The company’s European revenue will surprisingly be stable due to better management of the Nordic distributor acquisition, U.S. sales will continue to impress from the store roll-out, and the Walmart deal will be announced. How the company does in the second half of 2012 is less clear.

2. At some point in the year Green Mountain Coffee growth will slow down markedly as consumers grow weary of the brewer and K-Cup price increases. After the stock falls, Starbucks will acquire the company at a large premium.

3. Netflix net subscriber adds will continue to disappoint as customers flee and Starz video content disappears. The stock will get crushed low enough where Amazon, Microsoft, Google, or Apple (not Facebook, sorry Herb) will buy the company at a large premium.

4. U.S. economic growth will sputter. The Fed will panic once again and do QE3 through large-scale mortgage securities purchases.

5. Gamestop will underperform on the fading video-game console cycle and the lack of blockbuster titles in 2012 vs. the previous two years.

6. SINA Corporation Weibo (Chinese Twitter) user growth will plummet as new real-name government regulations take effect.

7. Social network casual gaming growth will decelerate and Zynga will suffer.  The "Curse of JR" will strike again for Electronic Arts as the company acquired social networking and casual gaming companies at "top of the cycle" prices and valuations.

8. Nintendo’s Wii U console and Sony’s Vita portable gaming handheld will both flop hard in the U.S. as casual and mobile gaming continues to shift to tablets, smart-phones, and iPod Touch platforms.

9. Google Places will not gain any traction. Google will wind up acquiring Yelp or TripAdvisor to compensate.

10. The Dallas Cowboys will show just enough flashes of brilliance to get my hopes up, then punch me in the gut by choking and failing miserably in the end. (I had to put one no-brainer on this list)

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

Source: Motley Fool (Link), Yahoo Finance

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

Source: Ad Age full article link

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

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)

Consumables Growth is Strong and Average Spend per U.S. Consumer Bodes Well for Future

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

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

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)

If you drink a lot of seltzer water, it is a no brainer to buy a SodaStream machine. Not only do you save the environment with less plastic bottles wasted, you also save a ton of money.

Here is how to get the best deal right now on a SodaStream machine. I would avoid the $125 model they have at Costco. It’s not worth the extra cost especially because it uses the bigger CO2 canister, which you can’t exchange at most places.

Stick with the $80 model sold now at most Staples and Target locations. You get the same functionality AND the ability to exchange the 60L CO2 canisters at Staples and Bed Bath & Beyond locations.

Use the “Where to Buy” function on the SodaStream web-site (Link) to find your local Staples and Target locations that have it and also find which Staples and Bed Bath & Beyond locations do the CO2 exchanges.

Although both Staples and Bed Bath & Beyond do the 60L CO2 exchanges for $15, I would recommend doing the exchanges at Bed Bath & Beyond because you can use the $5 coupon they mail out multiple times a year. Just sign up for the coupon mailing list at the store or on the Bed Bath & Beyond web-site.

For $10 per 60 liter CO2 exchange after the $5 coupon, you get an amazing 16.6c per seltzer liter. You also save the environment with no plastic bottles wasted. If you drink soda, you get the added benefit of better nutrition vs. normal brand-name sodas (Link).

So in summary for the best deal deal buy the $80 SodaStream model at Staples or Target and exchange your 60L CO2 canisters at Bed Bath & Beyond customer service desk for $10 after the $5 coupon.

AMZN – Amazon has recently increased its Kindle Fire orders to more than five million units before the end of 2011 as pre-orders for the machine remain strong, according to sources from upstream component suppliers. Amazon already raised its order volume once in the middle of the third quarter, up from 3.5 million units originally to four million units. Link

Bob Rodriguez interview – What’s your outlook for the economy and stock market in 2012? Decidedly cautious. I believe Europe is in or near recession and that the odds are increasing north of 50% that the U.S. will be in recession next year. I’m looking for GDP growth at about 1%, probably even lower at times. It’s going to be a very languid year economically, and the stock market will face profitability issues along with governmental issues. Link

“Motherboard makers have been impacted by HDD shortages arising from flooding in Thailand since mid-October, and are expected to see their fourth-quarter shipments decrease 10-15% on quarter, according to industry sources.” Link

AAPL – “According to a Chinese-language Commercial Times report, Apple is likely to adjust downward its shipments of iPhones and iPads from related suppliers by 10-15% in the fourth quarter.” Link

WSJ – “Mr. Berlusconi has resisted calls for his resignation as worries about Italy’s ability to rein in its debt have grown. A routine budget vote set for mid-afternoon in Rome is seen as a key test for the Italian prime minister, with failure potentially setting up a confidence vote… Investors hope that a new government formed in the wake of a Berlusconi ouster would be able to move more quickly to reassure markets.”

”Japan’s Olympus Corp. said Tuesday it covered up investment losses for decades and used a series of acquisitions to clean up its books, helping clear up some of the mystery surrounding those deals and reversing weeks of statements defending the transactions.”

”With Italian bond yields surging higher, analysts said Italy is at the brink of being unable to afford to borrow in the public markets… And with €1.9 trillion in debt ($2.62 trillion) and €200 billion of debt coming due next year, Italy can ill afford to see rates remain at these high levels.”

“The EFSF’s chief executive, Klaus Regling, said euro-zone ministers would discuss the two options and hoped to have one or both of them in place by December.”

”Dynegy’s plan to eliminate billions of dollars owed to bondholders while sparing parent company shareholders flips usual bankruptcy rules on their head. Creditors are usually paid first during bankruptcy proceedings and shareholders often are left with nothing”

Source: WSJ

Source: Tech Report

Source: Maryland Costco

(Paul Tudor) Jones also thinks the markets may end up forcing the federal government to clean up the nation’s balance sheet in as little as three or four years from now. And he said that would present a once-in-a-generation opportunity to own assets. Link

WSJ: Sales at U.S. chain stores last month rose 3.4% compared with October 2010 for the 22 retailers tracked by Thomson Reuters, but that was less than the 4.5% rise expected by analysts and the 5.1% notched in September. Link

Bloomberg reports on Apple’s operational competitive advantage. Link

Sodastream CEO presentation on September 8, 2011 Link

Notice on “Slide 39” during a presentation the SodaStream CEO gave in September 2011; there is nothing on Target, Staples, and Costco.

Using the “Where to Buy” feature on the SodaStream website (Link), I find the product is now available in about 1/2 of Costco locations (a rough sample estimate) and every Target and Staples store in my area (Note: this may not be the same across the country). 

A friend of mine in California said SodaStream was recently made available at his local Costco. My wife told me she saw SodaStream being demo-ed and sampled last weekend at our local Costco on the East Coast. I called that Costco up and an employee told me they had 100 units in stock.

I drove to my local Staples tonight and saw a huge end-of-aisle SodaStream display with 12 units right out in front when you walk in. It was right next to the Green Mountain Keurig display. I talked to an employee who told me he set the display up TODAY and they have one more box of inventory in the back. I estimate this Staples store got 20 units shipped-in.

I drove to my local Target and found the SodaStream display in the home kitchen area next to the microwaves and water filters. There was shelf space for 20 units. It looked like about 5 units were sold. I used the inventory checker with one of the units and found there was no more stock in the back. A Target employee told me it was a recent launch.

In previous SodaStream conference calls, management talked about a small 12 store test trial at Costco, which we now know had a large roll-out ramp up in the past week to more locations. Management also talked about testing at a big box mass-market discount retailer in the past year. Now we know that was Target with a massive roll-out this quarter. The Staples roll-out today is another positive surprise.

Costco has 432 stores in the U.S. Target has 1767 stores in the U.S. Staples has 1575 stores in the U.S.  I do not know the exact store roll-out numbers, but from a dozen zip code searches on the Sodastream site’s “Where to Buy” feature it looks pretty significant across the board.

If you do the shipped-in math of 20 units per added Target and Staples stores and 100 units for 1/2 of the Costco stores for $80-120 per unit, it is easy to see upside vs. the Wall Street estimate for U.S. SodaStream revenue this quarter. Please note this is U.S. revenue only. I have no visibility on their sales in Europe.