Editor's note: The following article was originally published on Mar. 5.
My job as chief investment strategist for Game-Changing Stocks requires me to look for "the next big thing." Sometimes that means I'm looking through obscure government reports to learn about the latest technology the Pentagon is using that could soon make it to a retailer near you. Other times it means I might be on the phone with an executive of a small company with designs on changing the way we fuel our cars -- or treat patients in hospitals.
But sometimes, I see a game-changing product right in front of me. And I just have to tell my readers about how they can profit from it.
You don't have to own shares of Coca-Cola (NYSE: KO) to know that through its worldwide production and distribution network, the company owns some of the most valuable brands in the world. All told, Coca-Cola pours 3% of the beverages served to humanity each day.
And you don't have to work on Wall Street to know that shareholders have done pretty well in the past decade...
Coke products aren't the most-consumed liquid overall, of course. Good old H2O accounts for the most amount of servings, then tea. But as far as soft drinks are concerned, Coke and Diet Coke are the No. 1 and No. 2 brands in the world.
This planet consumes 55 billion beverage servings a day. Globally, the research consultancy Datamonitor pegs the soft-drink market at an eye-popping $216 billion annually. Beverage Digest, a trade publication, puts the value of the U.S. soft drink market at fully $74.2 billion a year.
The beverage industry is extremely large, highly fragmented and intricately complex. Some brands are doing well. Others are -- forgive me -- flat, and a few are on the express train to Donesville.
But the industry view from 30,000 feet isn't so hot. Beverage Digest, in its 2011 rankings, noted that carbonated soft-drink sales fell 0.5% in 2010, which, though still negative, still turned out to be better than the more worrisome declines in 2009 (2.1%) and in 2008 (3%). Soft drinks haven't seen an increase in U.S. sales since 2004, which seems to indicate people are cutting back for reasons other than the lackluster economy. Consumption is, for now, at 1996 levels.
So should investors steer clear of this industry? Not if you want to miss out on a game-changing company with virtually unlimited potential.
Let me explain...
It's not like Americans are suddenly drinking more tap water. As tastes have turned against soda, the national preference has come to embrace bottled water, bottled teas, sports drinks like Gatorade and energy drinks.
(Brief aside: Red, which didn't even enter the U.S. market until 1997, 10 years after its creation by an Austrian entrepreneur, is now the seventh-largest soft-drink brand in the world, with some 3 billion cases sold annually.)
Two things worth noting emerge from all this:
1) The soft drink market is losing market share, but its dollar value is not declining. Revenue rose 0.4% in 2010, according to trade group data. So while consumers aren't buying as much soda, they are still willing to pay for it, even in tough times.
2) The second trend, perhaps obviously, is the move toward "healthier," "greener" and other alternatives that are perceived as virtuous.
Not for nothing, but, as I've mentioned, soda volumes are down, and not just a little, but by 12.5% from 1999 to 2010.
And my counterarguments about the evil of corn syrup, etc., notwithstanding, no one ever went broke exploiting the American public's misunderstanding of wellness concerns. Create a product that just seems healthy (or neatly addresses some sort of faddish environmental or medical concern) and the masses will beat a path to your door.
This is the same country that watched 10 years of TV commercials about how high cholesterol could kill. No one ate any healthier. But sales of Lipitor hit $12 billion a year.
This rant does serve a purpose: To set the stage for a telling you about a company that is seeking to address both of the soft-drink industry trends I just mentioned, and I think it has a great shot of making a fortune doing so.
SodaStream (Nasdaq: SODA) is an Israeli company that makes a carbonation machine that makes custom-flavored sodas. The company has a razor/razor blade business model, given that it sells both the machines -- which cost anywhere from $79 to $199 -- as well as consumables like CO2 cartridges, flavoring and special carbonation bottles. The company's worldwide retail footprint comprises 41,000 stores in more than 40 countries, including mass-market chains in the United States.
The appeal of the product is multi-faceted...
It is "green." The company's products allow consumers to forgo aluminum cans and plastic bottles. The special bottles used with the carbonation system are either glass, which can be used forever, or high-grade plastic that can be used for years.
In addition to saving waste, the materials SodaStream has chosen to use are healthy: Free of bisphenol-A, or BPA. BPA emits hormone-like substances. A 2010 Food and Drug Administration report raised concerns about exposing unborn babies and children to BPA. In September 2010, Canada declared BPA a toxic substance, and Canada and the European Union have banned it in baby bottles.
It is (perceived) as a healthy. The various flavors do not contain high-fructose corn syrup, and the sugar-free versions do not contain aspartame (Nutrasweet) or saccharine. The sodas can be made with fresh juices and other natural ingredients.
The trend among foodies is to eat food that is as little processed as possible. Homogenous Coca-Cola is the (beverage) epitome of processed food, perceived as overpackaged, loaded with chemicals and laden with nasty preservatives. Soda made fresh, by Mom, at home is exactly the same as what you can buy from Coke, but with a fresh lemon garnish and purified water ice cubes, it seems homier and healthier.
It's convenient. Lugging around a case of Diet Coke is a chore, especially for customers in urban markets. SodaStream not only is less to carry, but it takes up less space in the kitchen and the refrigerator. And, frankly, it's cost-competitive. Water comes out of the tap, CO2 cartridges cost about $30 for 60 liters of soda and flavoring costs $4.99 for 500mL, which makes about 12 liters. That puts the 2-liter cost of the soda at $2.16, excluding the machine, which is comparable to other mainstream sodas and cheaper than premium options.
The company might have summed it up best in an SEC filing: "We believe that demand for our products will continue to benefit from sevlarity of products perceived to be better for the environment, the increaeral long-term trends in global consumer behavior. These trends include the green movement and the popused importance of value and savings in consumers' lifestyle and purchase decisions and increased demand for food and beverage products that promote health and wellness."
This has meant good things for the company's revenue, which has increased an estimated 151.3% since the year ended Dec. 31, 2007. Not only is growth steady, but the company is already resolutely profitable, with a margin of 6.0% in 2010 and 9.9% in 2011. Those are estimable results in a very tough industry. Pepsi earns a net 7%, Coke about 16%.
The strategy to grow is solid: Expand its retail footprint geographically across a variety of price points and functionally own the do-it-yourself soda market, then expand into office systems and food service.
That, to my mind's eye, is the money shot.
I've tried SodaStream products, and they're good, at least as good as the other stuff that is out there, but add booze into the mix and you might just have The Real Thing. Restaurants live and die on high-margin alcohol sales, and customized boozy sodas might be a nice way to augment the till behind the bar.
I like this product. I like that the company is profitable. I like its prospects for growth, and I like that it is riding a pair of trends -- wellness and the environment -- that I think have real legs as consumer movements. I also like that the company, valued at about $769 million, has a lot of room to grow.
Risks to Consider: SodaStream is still growing, and it's not inconceivable that it'll experience some growing pains along the way. The stock can be a bit volatile sometimes, so it's important that you be able to stomach the day-to-day swings, keeping in mind that this company is capable of big things.
Action to Take --> You may want to wait to buy this stock on any pullbacks, but I think shares are a good "buy" at their current level for aggressive growth investors.