Many of you know I like talking about "the next big thing." Rather than waste my time weighing in on where Facebook (NYSE: FB), Google (Nasdaq: GOOG) or Apple (Nasdaq: AAPL) is headed next, I'd much rather spend it looking for "the next Facebook," "the next Google," or "the next Apple..." If you're a reader of my Game-Changing Stocks newsletter, then you know exactly what I'm talking about.
But today, I want to update you on a stock I've told you about already -- a company making a product in an industry that's "already arrived." In fact, it's been around in some form or another since at least 1876.
Now, an industry this old certainly doesn't qualify as cutting-edge... But nonetheless, like any game-changing stock, this company makes a product that disrupts the marketplace and changes the way its users live their daily lives.
I'm talking about the soda business. But before I give you the scoop on the stock I've been following, let me give you some background on soda's history.
Way back when Coca-Cola (NYSE: KO) and Dr Pepper (NYSE: DPS) were largely unknown regional concerns, another soft drink maker had already achieved national name recognition. The yellow-and-blue box the product came in was a familiar site in many homes.
Charles Hires had discovered the recipe for an herbal tea while on his honeymoon and formulated a concentrate that could be mixed with water and yeast. A friend of his, with a nod to the rough-and-tumble coal miners that were the drink's initial market, suggested that the tea be rechristened. Thus "root beer" was born, and the idea of making soft drinks at home actually predates the iconic curvaceous bottle filled with chilled Coca-Cola.
SodaStream (Nasdaq: SODA) is basically doing the same thing, but with a twist. Instead of yeast, it uses CO2 cartridges to give soda pop its fizz. A special countertop machine the size of a blender mixes concentrate in special reusable bottles.
I first told my Game-Changing Stocks readers about SodaStream about a year ago, while the product was available on a limited basis and was not being advertised. Then, I wrote an article for StreetAuthority.com back in March explaining how, if you're looking for a solid growth stock, you should forget about Coca-Cola and go for SodaStream instead. (Coke has had an amazing run. And I have no doubt about the immense global value of the brand. But as far as growth stocks go, that ship has sailed.)
Today, SodaStream is available everywhere, and commercials for its sodas are commonplace on TV.
Soda is vilified among the granola set. Its various chemicals, preservatives, carbonation, sweeteners, coloring are all said to cause health problems. Add to that the obesity epidemic in this country, and it's clear that moms are looking for other alternatives. SodaStream, made at home, is perceived as healthier. Making the drinks is portrayed as a wholesome family activity to be enjoyed after a long bike ride or soccer game. Whether this is true, of course, is wholly irrelevant. Perception is reality, and SodaStream has been artful to give itself all of soda's advantages with none of its drawbacks.
Unsurprisingly, the machines and the flavorings are flying off the shelves. I like the device because it has a variety of sugar-free options. And the stuff is actually cost-effective when compared with name brands like Coca-Cola and Pepsi (NYSE: PEP), after the cost of the machine has been recouped. For families that drink a lot of soda, these savings can be appreciable -- or at least perceived as appreciable -- which might push a consumer into the roughly $100 purchase.
The thing that I like most about this company is that it has a long history of profitability. Even during the financial crisis the company made money, and most recently, in 2011, it turned a roughly 10% net profit on $289 million in revenue. In the second quarter of 2012, the advertising really began to pay off, and SodaStream did $100 million in business. This year, the holidays could blow the barn doors off. I expect this to be a hot Christmas item, which could provide a shot in the arm in the fourth quarter along with residual product sales for the next year.
Despite a good performance year-to-date, these shares are priced cheaply, at only 23 times earnings. For a company with such growth potential, that strikes me as unduly inexpensive. Given its sales and earnings this year alone, I think the shares have a fair value of $1.2 billion (30 times anticipated 2012 net earnings of $40 million). That's more than 50% upside for this year's results, which are already largely achieved. And that projection is purposefully conservative -- it's a scale-out of the second quarter with no additional holiday sales built in.
Action to Take --> SodaStream is going places. The machines have already made their way from the shelves of upper-middle income shopping destinations like Bed Bath & Beyond (Nasdaq: BBBY) and onto the shelves of Wal-Mart (NYSE: WMT) -- the holy grail of mass market accessibility.
These soda machines are going into homes, and heaven only knows where else they could end up. The company is already testing non-alcoholic spirit mixers in the U.K., and I expect these to make an appearance in the U.S. in time for the holiday shopping season. My guess is that restaurant chains will eventually figure out a way to make exclusive signature sodas that include alcohol, which would elicit thousands of machine sales and a significant quantity of lucrative customized product. Right now, however, the company seems focused on changing the way upper middle income families enjoy soda pop, and its considerable success in that regard so far is enough to put these shares on my radar screen.