Tag: PEP

Looking at Sodastream

Sodastream (Nasdaq: SODA) is an Israeli company that markets those “make it at home” carbonizers where you can make frizzy water, juices, and so forth, at home. Pepsi announced it would be buying it out for $3.2 billion.

What’s interesting is the financial history of the company:

From 2013 to 2015, the company actually had declining revenues (down over a quarter) for a couple years and their profit levels went down as well. However, in 2016 they got back on track and managed to find a way to sell more and do it more profitably.

When looking at the stock chart:

Clearly in the middle of 2015 to the beginning of 2016, when things were at their financial worst, the market had valued SODA like it was some fad cupcake stock (wiki), but this would have been the perfect time to buy. A well-timed $12 investment would have turned into $142 presently.

The financial metrics of SODA at the end of 2015 (ended 2015 at $16 but crashed to $12 in January and February 2016):
Price/Sales – 0.83
Price/Earnings – 29

Today, Pepsi is paying (using 2017 financials, please realize I’m taking a shortcut and not using Q1 or Q2-2018 figures and taking the past 12 months) a Price/Sales of 5.9 and a Price/Earnings of 43.

Incredible. Let that sink in for a minute since people buying into Sodastream in late 2015 or early 2016 have made a fortune.

I’ll note that the balance sheet of SodaStream is not that special – it has a bit of cash in the bank, and no significant debt. They are not a book value play at all. The balance sheet (other than internalized Goodwill) is not a factor at all in this investment.

Finally, I will leave this following comment about investment psychology: Imagine you were convinced that Sodastream was going to turn around and start making significant amounts of money again at the end of 2015. You bought shares at $18 and took a heavy position in December 2015. Just a month later, your position was down to $12/share and it is a third (33%) under water. At that time, you must be feeling pretty stupid about your investment, not knowing that it would skyrocket over the next two years. The psychology of investing is a very odd one – at that point of maximum pessimism (at $12) people would probably question their own investment decision, whether the market sees something they didn’t. There were probably people that bought in at $18 and sold out at $12 because they couldn’t take a 33% loss on the way up to a subsequent 1,100% gain.

Soft Drinks and Pseudovariety

Philip H. Howard, a professor at a university in the state of Michigan, wrote a paper dealing with the structure of the soft drink industry. He determined that when you link the variety of brands back to their parent companies, three companies controlled 89% of the scene given a retail sample in Lansing, Michigan (the state capital, metropolitan area population of approximately half a million people).

When reading the paper, strictly from an economics standpoint, leads me to ask two questions:

1. If you are invested in the industry (e.g. in Coke or Pepsi), how likely is it that the industry will continue to be entrenched as-is for the indefinite future? Warren Buffett made a large bet that it will be. How can a company such as Coca Cola destroy its own brand?

2. If you are a potential competitor to the industry, how do you break into the field and still make money? The industry is quite self-protective and will purchase or destroy competitors, as appropriate – they have plenty of tools to doing so, such as purchasing optimal shelf space at grocery chains, etc. Witness Jones Soda (Nasdaq: JSDA) for an example when you get on the radar of the majors.

Note that there are similar industries in nature – in particular, tobacco and liquor distribution come to mind. Tobacco is an industry that is almost impossible for a newcomer to break into the field because of government protection. Liquor is somewhat less restrictive, but the only real breakthroughs have been with beer and wine as opposed to hard liquor.