market folly

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Whitney Tilson of Kase Capital who pitched long SodaStream (SODA).


Whitney Tilson's Value Investing Congress Presentation

•    SodaStream (SODA): Home beverage carbonation system – makes money off the machine, the bottle, the carbonation and the syrup. The carbonation and syrup lead to repeat sales. Razor/blades model.
•    70% cheaper once you purchase the machine. 25 cents per carbonated liter. 30% cheaper if you add flavor versus other products. Convenience – you don’t need to carry around bottles, etc.
•    A lot of choices flavor wise. Environmentally friendly.
•    Target market? People who like to drink sparkling water. Households with multiple people – flavoring or the soda drinker in the household. 
•    It is NOT competing against coke and pepsi – they do sell coca-cola variants, but in Whitney’s experience, not the best taste – however the other flavors taste good and are popular.
•    SODA looks like Decker’s to Whitney.
•    Beaten down stock – has fallen tremendously, with a high short interest.
•    Mistaken view that it is a fad – United States don’t realize the business has a strong share overseas, only 1-2% share in the USA. 393 people surveyed for SodaStream – people love their SodaStream machines and use / recommend them frequently.
•    Are the problems fixable?  USA sales growth is decelerating – believes it is temporary, due to the worst holiday selling season and 16% growth isn’t bad! In the second half of FY13, brought on with Wal-Mart. Plus, marketing and ad spend didn’t deliver. Europe as a matter of point grew 38% YoY. Secondly, SODA did not deliver on gross margins. Missed margins on machine sales as they wanted to get machines out to consumers – drive unit growth for the consumable business (syrups/carbonation). Whitney believes this was worth the cost. 
•    Enormous Global Market: a lot of white space for future growth and market penetration.
•    Position of Market Leadership : SODA owns the market, no real competitors. Large active user base.
•    Attractive economic characteristics : 50% gross margins, not capital intensive, decent profit margins. Healthy balance sheet. Further, attractive growth opportunities, YoY growth story for the past years. Flavor is the highest margined business (margins are not broken out). In Switzerland a mature market, 80% of sales or more are CONSUMABLES – 25%+ operating margins. USA generates 5% operating margins give or take, due to machines as a mix of sales.
•    Moat? Co2 cartridges require expertise and reverse logistics as many countries consider these items dangerous, large installed base, industry know how and the brand name.
•    Samsung one example of a company that is partnering with SODA stream to install in their refrigerators.
•    Valuation – doesn’t look cheap, trading at 22x trailing earnings guidance is for 3% growth, EBITDA growth ~15%. Looks exp. On a PE basis, fairly valued on EBITDA basis. Why is this cheap? Brings up the GoodCo / BadCo example. You should look at the businesses separately.
•    Western European business – 31% growth last year, 33% previous – their cash cow mature market. Thinks they earn 2.34 a share out of Western Europe (versus 1.82 total business).  15x multiple on that business ~$35 or roughly the entire share price today. You get the USA biz for free. •    Another way is to look at the refill business – 7mm installed base, trading around ~8x refill business.
•    Doesn’t think the Coke/Keurig Cold competition – no product out yet. Chemical carbonation isn’t on par with the later, plus costs are expected to be higher.
•    If you want a cup of coffee you have to make a pot – a waste, so Keurig makes sense. If you want just a coke, you can purchase a can or go to a vending machine, what is the value add from Keurig Coke? Doesn’t make sense to Whitney.
•    What could go wrong- poor earnings next quarter and inventory levels. Q1 earnings will be bad, perhaps it will offer a better entry point. 


Be sure to check out the rest of the Value Investing Congress presentations.