SodaStream: A smart move for the patient investor

Author: Riddhi Ruparelia

Covestor model: Long-Term Growth

Disclosure: Long SODA.

As first quarter earnings came out, most of our companies continued to show tremendous success in their businesses. However, the market reaction hasn’t been entirely as positive due to the fact that most of the small cap businesses we own are in the “investment for growth” phase and that generally translates into a higher focus on top line rather than bottom line. However, as  a patient long term investor, we are used to such reactions and always like to take the opportunity to further build our position when market reacts unjustifiably.

Specifically, we see tremendous opportunity in our top holding SodaStream (SODA). The company announced blow out results on the top line as well as all other metrics for the fourth quarter of 2011. However, the market chose to focus on one specific number – that is, the 7% year-to-growth in number of soda maker kits sold in that quarter. While it’s justified to focus on number of kits sold, management did not clarify details behind the number in press release and also in investor presentation slides during the earnings call.

However, they explained three points during the call that actually reversed the picture completely. Here is our interpretation of the call. (We ask you to not depend on our interpretation and listen to the call to make your own conclusion.)

– First, sales of soda maker units in the US actually grew by 45% in Q4. As the company pushes heavily into the US market, we believe this is the number that matters more than worldwide number.

– Second, some of the retailers and distributors actually built up inventory in Q3 to secure supplies. This is what prompted management to ask investors to compare second half of 2012 to second half of 2011 for true growth of soda maker units.

– Last but not the least, as the company acquired distribution rights in Nordic territory, the Nordic distributor justifiably chose not to replace inventory in Q4 which reduced units sold to distributor and reduced total units sold in Q4 by the company to all channels.

Once you put this picture together, it seems like actual sales of soda maker units to consumers worldwide grew much more than 7% growth of sales the company saw to its various channels. At this point, we remain firm believer in SodaStream story and will be looking to add more on weakness.