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Blessed Are the Drink Makers

By Rick Munarriz – May 12, 2013 at 10:30AM

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It was a good week to bet on Green Mountain and SodaStream.

It was a good week to be tending the bar. SodaStream (SODA) and Green Mountain Coffee Roasters (GMCR.DL) moved higher -- up 9% and a whopping 33%, respectively -- after posting blowout quarterly results.

Remember when SodaStream's carbonated-beverage machine was supposed to be a novelty? Remember when last year's end of Green Mountain's K-Cup patents was supposed to be the end of the company's growth?

Well, shares of SodaStream and Green Mountain hit fresh 52-week highs on Friday.

SodaStream's revenue climbed 34% to $117.6 million, and profitability rose 20% to $12.1 million or $0.57 a share. Wall Street was settling for earnings of $0.54 a share on just $113.1 million in revenue.

Net sales at Green Mountain rose 14% to top $1 billion. That was shy of analyst targets, but all was forgiven when adjusted net income soared 45% to $0.93 a share. The pros were betting on $0.73 a share out of the java jobber.

The two companies are often lumped together because they're championing the movements of quality self-made beverages, but they don't move in lockstep.

Margins contracted at SodaStream. They expanded at Green Mountain. There are also seasonal differences in consumption trends. Coffee heats up when the temperatures drop. Soft-drink sales spike when the weather heats up.

However, both companies did see their higher margin consumables grow substantially faster than their starter systems. In other words, the beverage machines that were gifts during the holidays aren't collecting dust in the attic. They're being used -- a lot.

There may have never been an inherent need for people to be their own baristas or soda jerks, but the convenience, freshness, and value propositions have proved difficult to ignore. The models have been validated, and that became clear last week on Wednesday, when Starbucks (SBUX 1.61%) -- seemingly the one company with the most to lose if Green Mountain succeeds -- widened its relationship with Green Mountain to triple the number of Starbucks products it makes available through Green Mountain's K-Cup and Vue portion packs through at least the next five years.

This favorable momentum won't last forever, but the near-term perspective is bright. Both companies boosted their full-year outlooks.

The heady runs by both stocks may suggest that they're overvalued. Green Mountain shares have more than quadrupled since bottoming out this past summer. However, SodaStream and Green Mountain are really only fetching 18 and 22 times next year's profit targets, respectively. That may not seem cheap, but keep in mind that Coca-Cola (KO 1.12%) is also treading at 18 times next year's income estimates, and the cola giant's top-line growth is in the low single digits. Starbucks is growing a bit faster than that, but it's not as fast as Green Mountain despite trading at a hefty 24 times next year's earnings.

SodaStream makers and Keurig single-serve brewers are both cool and hot right now. Investors betting against them may want to check the temperature if they don't want to get burned again.

Longtime Fool contributor Rick Munarriz owns shares of Green Mountain Coffee Roasters and SodaStream. The Motley Fool recommends Coca-Cola, Green Mountain Coffee Roasters, SodaStream, and Starbucks and owns shares of SodaStream and Starbucks. 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.

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Stocks Mentioned

Keurig Green Mountain, Inc. Stock Quote
Keurig Green Mountain, Inc.
GMCR.DL
SodaStream International Ltd. Stock Quote
SodaStream International Ltd.
SODA
The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
$56.65 (1.12%) $0.63
Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$85.62 (1.61%) $1.36

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