Austin Smith: I've actually got three stocks that I'm going to be stalking pretty closely in 2013 -- Colgate, Arcos Dorados, and SodaStream -- all for very different reasons.
I've always loved Colgate. I think they're one of the best companies in the consumer goods space. They have sector-topping margins, they've got a great dividend, they've got a significant amount of exposure to emerging markets. Their largest market is Latin America. The return on invested capital is 40-plus percent.
I just think they're a phenomenally well-run company. They've just never been that cheap, which is why I haven't pulled the trigger until now, but at some point it's worth paying 20 times earnings for a company that's going to compound as much as they are over the next decade.
I'm also looking at Arcos Dorados. I think this company has been a bit misunderstood, and really got taken down hard in 2012.
Eric Bleeker: How much is it down, for people out there?
Austin: Let me check.
Eric: Oh, well, I'm going to have to jig over here while you look it up.
Andrew Tonner: I was going to talk about another potential tech theme I think is interesting; one that I've been skeptical of but revisited too, would be the hard disk drive manufacturers.
It's an interesting market to me because it's a market where you continually have the price of your product under pressure, but now the market structure is such that it's effectively a duopoly between Seagate Technology and Western Digital now.
Say what you will about them being tied to the PC, but at the same time the cost-per-storage basis now for hard disk drives is still cheap enough where it's not going to be in a meaningful way disrupted by solid-state drives, and that brings up the cloud, which is a growth story in tech that they have exposure to.
You have maybe a PC market, depending on which analyst you look at, that might be relatively flat to, say, somewhere below 5% growth, but you have this cloud play that they're both exposed to. They're dividend-heavy stocks in an industry that basically these two companies control together.
I think it's interesting. I don't think I'm necessarily... I'll have to do some more research to look at it, but it definitely is a compelling, at least, high-level storyline.
Eric: I would just say for investors out there, you've got Seagate -- and these figures might not be entirely correct -- but I think it was in 2011 or thereabouts it was about $1.11 earnings and past $7 today. You see the volatility that can come with these models.
Seagate's paying out 20% right now, I believe it's cash flow or earnings for the year ahead -- and yielding 5%.
Andrew: Yeah, exactly. It's still pretty impressive payouts.
Eric: You can do that when you're at a P/E of four-ish.
I think it's fun to nibble on. I'm getting more interest in it. Why I would prefer Seagate, of the two -- or even in some ways over a start-up like a Fusion-io or, I own EMC, but other plays and broader storage -- with Seagate, they're very enterprise-heavy so I think that buffers.
When your storyline is about the death of PCs, but you're heavy into enterprise, there might be a misconstrued storyline to the business reality of the company. I think people won't be thinking about that with Seagate, and why I would prefer them a bit over Western Digital itself.
Anyway, back to...
Andrew: Quick detour.
Austin: After that nice diversion, Arcos Dorados is down about 40% for the year. It's a pretty misunderstood company. If you look at their earnings, they look horrendous because their big market is Brazil but they're not located there, so weakness in the Brazilian currency has just made their earnings look like garbage, but on a constant currency basis, their same-store sales have been very impressive.
They continue to grow at really aggressive rates. They have, undoubtedly, the world's best brand in the restaurant space, McDonald's brand, the exclusive rights to it, and they are so far away from saturation in Latin America and Brazil in particular, it's amazing.
There's one McDonald's for every 22,000 citizens in the U.S. There's one for every 320,000 in Brazil. Now, of course they're not going to get to the same saturation as the U.S., but you can just see that chasm to fill, and just continue adding stores easily for years to come.
The last one I'm looking at is SodaStream. This is a company that's got a great balance sheet, they're growing revenue at about 50% a year over the last year, now that they've expanded in a meaningful way into the U.S. They've got a winning model with their "razor and blade" model that should lend itself well to higher margins down the road.
I've talked to a lot of SodaStream users and they're all deeply passionate about their product, still buying those "blades" even after two years of ownership. I think they get sold down a lot, because they get sort of a Green Mountain Coffee Roasters...
Eric: I was going to say, comparing the two, is that a question for you?
Austin: No, because when you look at... There are a couple of reasons. One is usage patterns. People who buy the Green Mountain Coffee Roasters' Keurig K-Cups, they have this huge initial usage and then it drops off dramatically after they own the device for a few months.
You get the surge in initial K-Cup sales that you carry forward with you, that never pans out. SodaStream doesn't see that same drop-off.
Another thing is that the Keurig K-Cups lost their patent protection in September, and there's already other companies entering the field, producing other K-Cups now that they're off patent. You see them at Safeway and Kroger and whatnot, and that's really where they get their money, is on these wide-margin, easy-to-manufacture K-Cups.
Granted, they have multiyear contracts with some of their coffee brewers, but that's going to expire at some point, and I think Green Mountain is going to have to become a low-cost supplier.
Bringing that back to SodaStream, they don't suffer from any of that. SodaStream has been around for a long time. They were big in Europe in the '80s. They've suffered these patent expirations in the past. They have all the right retailer relationships now. It's going to be one of the big must-give holiday gifts of this holiday season.
To top it all off, they trade for a narrowly more expensive price-range multiple than Coca-Cola and Pepsi. Coke and Pepsi are around 19 times earnings. SodaStream is about 21 times, and they're growing earnings at 60-70% a year. It's pretty amazing.
Andrew: It's pretty compelling.
Eric: Yeah, I was shocked to see the longevity of that company. That should play into your thesis that this isn't a flash in the pan, by any means.
Austin: Deeply misunderstood, but I love the Green Mountain Coffee because it provides an opportunity for eager shareholders to jump in and get it while the price seems just artificially low, in my opinion.
