NY Post SodaStream Article Defies Logic

Submitted by Seth Golden as part of our contributors program.

Shares of SodaStream (SODA) have taken a hit over the last two trading days on little more than misunderstanding and the perpetual rumor mongering that maligns the stock time and time again. It is unduly one of the risks associated with the name. Let’s put things into longer term perspective when analyzing a stock that is up more than 100% in the last 18 months.

Over the last 18 months, shares of SODA have risen from $29.60 to well over $75 a share. The most recent rise in share price was due in large part to the rumors surrounding a potential buyout from Pepsico (PEP). Although the rumor was denounced by Pepsico’s CEO, shares of SODA held a premium for the remaining month of June. But all of a sudden that premium has completely been revoked and the share price is steadily declining below the May 13th Analyst/Investor Day price.

On July 9th, the NY Post released an article detailing their personal belief that SodaStream has been shopping itself over the last three months. Mind you they name no sources within the article and insinuate the opinion of an unnamed analyst. This is not the typical reporting methodology of well-respected media publications as most reporting agencies find themselves validated by citing and naming sources for their quoted materials in publication. For the sake of this report, let us now dissect the NY Post article. Below is a paragraph from the article:

While CEO Daniel Birnbaum has said he aims to shake up the multibillion-dollar market for carbonated drinks, behind the scenes the maker of do-it-yourself soda machines has been seeking a buyer for at least three months, sources said.

Notice that while the reporter alludes to a source while not naming the source, he doesn’t even go so far as to say the usually acceptable phrase, “sources close to the company”. This is a very important omission to the story as most reporters understand the fine line between stating “sources said” and “sources close to the company said”. Now let us move on to the next point of analyzing the article.

The Israel-based company is working with Rothschild as its informal adviser. Birnbaum declined to comment.

The problem with this statement is that it basically conflicts with the previous rumor surrounding an offer made to SODA by PEP and utilizing Goldman Sachs as a third party. To the trained eye, one has to scrutinize this noted offering of a deal maker in the face of previous rumors surrounding Goldman Sachs.

The biggest problem with the most recent rumors surrounding SodaStream and offered by the NY Post is the following:

Still, SodaStream, which projects annual revenue will rise from $550 million this year to $1 billion by 2016, has been having a tough time attracting interest.

The current sales trends and forecasted sales definitively support the expectations of the company. With this important fact, we have to accept what is “prudent business”. If you had the opportunity to buy a company that could most likely double its revenues with greater than 50% gross margins, how could you not look into the possibility of acquiring this particular business knowing the foundation for earnings potential included in the forecast? The most logical rationalization in debunking the notions that SodaStream can’t find a buyer, assuming that SodaStream was for sale to begin with, simply fails to “hold water” under rational thought. The facts are very simple to understand, SODA can’t find a buyer that it isn’t looking for to begin with. Who’s selling a company that is growing its consumables business at greater than 25% YOY, the razor blade portion of their business which nets over 65% gross margins combined? Again, finding a buyer requires looking for one and it doesn’t prove logical to look for one with the number SODA is currently producing alongside its future projections.

The lack of knowledge produced in the NY Post article continues with the following paragraph:

PepsiCo was only interested in part of SodaStream’s business ? refilling carbon dioxide containers ? and not the actual consumer appliance, one source said.

What the author clearly doesn’t understand is that the Soda Makers, appliances if you will, are among the highest gross margin producing small appliances in the small appliance sector at over 30% wholesale. This is no Keurig machine with less than .01% gross margins, if that. I would have to say that alongside the consumables product line, the appliance line is not only a necessity due to its gross margins, but also its patented design which focuses intently on how the CO2 attaches and is delivered through the soda maker system. Any buyer of SodaStream is going to have to buy the appliance patents at the very least, so why limit yourself and not buy the whole ecosystem. What makes SodaStream so great is the true carbonation of beverages that has not been able to be duplicated by other soda makers whom do not have the ability to use SodaStream’s patented technology such as Cuisinart and Primo Water Inc. Again, through greater analysis we are uncovering what is little more than a reporter creating unwarranted rumors without fundamental knowledge.

Moreover, now let’s look at the author’s complete fallacy concerning analysts’ opinions on SODA.

SodaStream’s sales talk is falling flat at a time when investors and analysts are mixed on its prospects. “I’m still not convinced this will be a permanent fixture in American households,” a source said.

First, in what way are investors mixed with regards to the company’s prospects as the share price clearly denotes investor confidence; keep in mind the stock is up more than 100% in the last 18 months. The mean stock price estimate is $68 a share with nearly all analysts covering SODA rating the stock a Buy; only two have a Hold rating. The reporter has done as much homework here as he did in the entire report which ultimately leads us to understand the lack of resourced information proposed by the author.

Now that we have carefully scrutinized the article proposed by Josh Kosman of the NY Post, we have to understand that with SodaStream, there is more going on behind the scenes than what is being speculated upon by the NY Post. Our detailed report includes the latest and greatest realities of operations during Q2 2013 for the company which have nothing to do with a speculative sale of SodaStream.

Investors should consider exactly what we are dealing with here in SodaStream. During the company’s first official Analyst/Investor Day event in May of 2013, the company hinted at its projected revenue potential for 2016 which is a little over two years out in time. During the event presentation, CEO Daniel Birnbaum eluded toward the company having the potential to achieve $1 billion in revenues by 2016. In fiscal 2013 the company will likely boast gross margins above 53% for the year and earn roughly $3 a share. Additionally, the company has also forecasted gross margins to expand to roughly 56% by 2016. Analyzing these metrics we have to assume SodaStream, barring any global economic slowdown of great significance, will earn over $5 a share by 2016, using an earnings/share growth rate of roughly 17% over the next two years conservatively speaking as the company has managed to exceed expectations every quarter since coming public in 2010. And Mr. Josh Kosman of the NY Post would have investors believe that there isn’t a buyer looking for this very type of business prospect. Frankly speaking, “You have got to be kidding”! Every aspect of Mr Kosman’s article fails to hold up under greater scrutiny and understanding of the SodaStream business.