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The ninth annual spring Value Investing Congress was held in Las Vegas last Thursday and Friday. Billed as the Super Bowl of value investors, the gathering features prominent money managers who pitch their best new investment ideas to an audience of their peers.
Former Motley Fool contributor Whitney Tilson lit up the conference with a presentation outlining his bullish views on SodaStream (NASDAQ: SODA ) . During his presentation, Tilson also explained why he feels the Keurig Green Mountain (NASDAQ: GMCR ) -Coca-Cola (NYSE: KO ) deal is more hype than substance. Whether you are bullish or bearish on SodaStream, Green Mountain, or Coca-Cola, Tilson's presentation is worth checking out. His main points are summarized below.
Tilson bullish on SodaStream
According to ValueWalk, Tilson established a 4% long position in SodaStream at an average price of $37.65. The stock now trades near $42, 11.5% higher than Tilson's purchase price. However, the value investor believes that SodaStream is still an attractive investment at the higher price.
The market's biggest concern about SodaStream is its decelerating U.S. sales growth. The stock sold off hard after slow revenue growth paired with a big dip in operating income caused 2013 numbers to come in lower than the market expected. Although sales grew 29% in 2013, that is down from 46% annual growth from 2010 to 2012; and management expects the growth rate to drop to 15% in 2014.
However, as Tilson makes clear in his presentation, demand for SodaStream's products remains robust. Revenue increased 26% last quarter despite promotional pricing in a competitive holiday season, and "slow" revenue growth in 2014 will still hit double digits.
Moreover, Tilson believes the company has a long runway for growth that is not reflected in the market price. The company's installed base reached 7 million in 2013, with 4.4 million added in the last year alone. Given that SodaStream has so far captured only 2% of the sparkling-water market and 0.2% of the carbonated soft-drink market, there is still potential for enormous growth going forward.
Even if the U.S. market opportunity is not as large as Tilson believes, there is clearly significant upside in the market. According to Tilson's presentation, SodaStream's U.S. operating margin is only 5%, while its Swiss operations boast a 25% operating margin. As the company grows its U.S. installed base, its margin will expand, thereby improving overall profitability.
Keurig Cold is a flop
The most interesting aspect of Tilson's presentation was his discussion of SodaStream's moat. He argued that direct competition is unlikely to emerge. Tilson characterized the Keurig Green Mountain-Coca-Cola deal as vague, speculating that Keurig Cold is just vaporware -- a term used to describe a product that is announced to the public but never makes it to market. Since Keurig Cold will not be launched until October at the very earliest, it is possible that the company is still working out kinks in the technology. If the technology turns out not to work, the platform may never hit the market.
However, after investing $1.2 billion in Keurig Green Mountain in what appears to be a bet on at-home carbonation, I find it hard to believe that Coca-Cola is going to allow Keurig Cold to never make it to market. One would hope that Coca-Cola evaluated the technology before making such a large investment. However, even if Keurig Cold does hit the market within the next year, the extent to which it represents a competitive threat to SodaStream is still uncertain -- and that is what makes SodaStream an attractive investment.
Handicapping the investment
Tilson views SodaStream as a low-downside investment with the potential to double or more within a few years. In a worst-case scenario, in which SodaStream's revenue growth continues to decelerate, the company would become a cash cow that returns a big chunk of its current market capitalization to shareholders each year.
At 18 times trailing earnings and with almost-certain margin expansion in the U.S., the company could pay at least a 5% annual dividend in a slow-growth scenario. In the best-case scenario, growth resumes at a much faster pace and the stock doubles, triples, or is acquired.
Whitney Tilson has a track record of buying growth stocks left for dead and riding them to new heights. His investment in Deckers Outdoor Corporation (NYSE: DECK), owner of the Ugg brand, turned out to be his best of 2013 after performing better than the market expected; the stock price doubled in 2013. Based on the risk-reward laid out above, SodaStream could be Tilson's next great investment. The company has captured only a tiny sliver of its potential market, no competitor has poses a legitimate threat to its soda makers thus far, and the company will only become more profitable as its U.S. installed base grows. Even if SodaStream does not resume stratospheric growth, its relatively low 18 price-to-earnings ratio offers investors significant downside protection in a slow-growth scenario. If you haven't already, now is the time to consider an investment in SodaStream.
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