Last night, Coca-Cola’s (KO) partnership with Green Mountain Coffee Roasters (GMCR) was the pop heard round the world, as Coke placed a big bet on home carbonation. Today, investors are trying to figure out what it means for SodaStream International (SODA) and its own home carbonation business.
Getty Images for SodaStream KeyBanc’s Akshay Jagdale and Lubi Kutua expect SodaStream, which had dropped 28% so far this year, to keep losing its fizz. They write:
We believe [Coca-Cola's] decision to partner with [Green Mountain Coffee Roasters] on its cold beverage platform validates the home carbonation category (i.e., significantly mitigates fears of "fad" risk), but, more importantly, signals who [Coca-Cola] believes the leader in the category is likely to be.
Given [Coca-Cola's] endorsement of [Green Mountain Coffee Roasters] as its single-serve partner in the fast-growing home carbonation category, as well as [SodaStream's] recent poor operating results (the Company negatively preannounced 4Q13 earnings on January 13, 2014), we believe investors are likely to view [Green Mountain Coffee Roasters] as the emerging leader in home carbonation, and we, therefore, expect that the recent negative sentiment on [SodaStream's] stock is likely to deteriorate further. As such, we believe current developments in the home carbonation category warrant a more cautious view on [SodaStream's] stock, and we are therefore downgrading our rating to a HOLD (from a BUY) until we see a more compelling reason to own the name.
Uh uh, says Citigroup’s Wendy Nicholson, who thinks SodaStream can benefit from the deal between Coca-Cola and Green Mountain Coffee Roasters. She writes:
We think there are several things to consider with regard to what this deal means for [SodaStream]. 1. This deal validates the home carbonation category, and when [Coca-Cola] + [Green Mountain Coffee Roasters] start to advertise and market the cold platform, we think that could be good for [SodaStream] (especially as we believe [SodaStream] will be a considerably lower-priced system than the [Green Mountain Coffee Roasters] cold drink platform). 2. We hope [SodaStream] hurries up and signs an agreement with [PepsiCo (PEP) (or Dr. Pepper Snapple (DPS), or crazier yet, Nestle/Nespresso) so that they too can offer premium/popular branded flavors to make with their machine. 3. We think the cost to compete likely goes up, and we suspect [SodaStream's] marketing expenses will rise. 4. We are glad that [SodaStream] has another 12+ month head start to figure out how to leverage its first-mover advantage in the category. 5. We think folks should remember that ~2/3 of [SodaStream's] profits come from Europe, where [SodaStream's] sales have grown 20%+ in each of the last two years, and where [Green Mountain Coffee Roasters] barely plays. Of course [Coca-Cola] can help hasten [Green Mountain Coffee Roasters'] entry into Europe, but in all practical terms, Europe should still be a good business for [SodaStream] for years to come.
Investors appear to agree with the latter, if only because SodaStream might now be a ready takeover target for one of Coca-Cola’s competitors (personally, I wonder how much of an impediment SodaStream’s West Bank factories might be to a deal). Shares of SodaStream have gained, while Green Mountain Coffee has, Coca-Cola has, PepsiCo has and Dr. Pepper Snapple has.
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