As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.
It's unlikely Buffett would ever buy shares of a company as small as SodaStream
In a recent 10-k, Buffett laid out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does SodaStream meet Buffett's standards?
1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.
Let's examine SodaStream's earnings and free cash flow history:
Source: S&P Capital IQ.
Over the past five years, SodaStream has grown its earnings dramatically. (The drop-off in free cash flow over the past year or so was due in large part to increasing inventory and capital expenditures).
2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it is.
Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.
Return on Equity
5-Year Average Return on Equity
|Green Mountain Coffee Roasters||31%||15%||15%|
Source: S&P Capital IQ.
SodaStream has been producing reasonable returns on equity. It employs almost no debt.
CEO Daniel Birnbaum has been at the job since 2007. Before that, he was a General Manager at Nike and CEO of Nuvisio.
SodaStream is attempting to disrupt the soda industry. Growth has been strong, albeit somewhat bumpy so far.
The Foolish conclusion
So is SodaStream a Buffett stock? Probably not, as Buffett would want to see the business model prove itself out over a longer period of time, though it does seem to bear some resemblance to one of his best investments ever, Gillette, selling low-margin machines to profit on high-margin consumables. However, we've learned that the company does exhibit several of characteristics of a quintessential Buffett investment: consistent or growing earnings, limited debt, and tenured management. If you're looking for another fast-growing consumer stock, check out "The Motley Fool's Top Stock for 2012."
Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter, where he goes by @TMFDada. The Motley Fool owns shares of PepsiCo and Coca-Cola. Motley Fool newsletter services have recommended buying shares of SodaStream International, PepsiCo, Coca-Cola, and Green Mountain Coffee Roasters, creating a diagonal call position in PepsiCo, and creating a lurking gator position in Green Mountain Coffee Roasters. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.