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(B)(N) SODA SodaStream International Limited

June 6, 2013

Deal Book. SodaStream? You say? SodaStream sells all the hardware and flavors that we need to fizz our own from ordinary tap water, which is a lot handier than carting back and forth cases and bottles of Pepsi & Coke and their empties.

Ms Fizz & The Soda Stream Party Line
Courtesy of SodaStream. smart. simple. soda.

Since coming out at $30 on the Nasdaq in 2010, SodaStream has made a lot of noise of its own with steady global sales growth and reliable earnings, but still no dividends.

Their first bubble burst in August 2011 allegedly on some weakness in quarterly earnings and a forecast weakness in earnings for the next quarter that dropped the stock price from $75 to $35 within two weeks (please see Exhibit 1 below) but, alas, the only failure was that the top-line sales increased by only +30% and the net income by only +100% over the year before.

Now, there’s a rumor afoot, vigorously denied by all the parties, that PepsiCo might make a $2 billion offer for the $1.4 billion company at the current prices.

Our estimate of the downside in the stock price due to the demonstrated volatility is minus (-$10) and so we would not be surprised by any price between the current $71 and $60 or $80.

It’s also trading significantly above the current Risk Price (SF) of $60 which would be the “fair value” dollar-for-dollar acquisition price instead of the current $100 that people are hoping for. The July put at $70 is available for $4.80 today and we can sell an offsetting call at $80 against our long position for $3 so that for the cost of holding the stock at $70 and the collar at $1.80 per share ($4.80 less $3.00), we can ride out the indecision and disavowal until we know more.

Incidentally, 40% of the stock is owned by five institutions so we don’t really know what to expect or when because 40% of $1.4 billion is just pocket-change for these folks. Maybe they don’t want to sell?

Exhibit 1: (B)(N) SODA SodaStream International Limited – Risk Price Chart

(B)(N) SODA SodaStream International Limited

(B)(N) SODA SodaStream International Limited

SodaStream International Limited manufactures home beverage carbonation systems, which enable consumers to easily transform ordinary tap water instantly into carbonated soft drinks and sparkling water.

(Please Click on the Chart to make it larger if required.)

From the Company: The company operates through four segments: the Americas; Western Europe; the Asia-Pacific; and Central and Eastern Europe, the Middle East, and Africa. It offers a range of soda makers; exchangeable food-grade carbon-dioxide (CO2) cylinders and refills; reusable carbonation bottles; and various flavors to add to the carbonated water, as well as sells additional accessories, such as bottle cleaning materials and ice cube trays. The company sells its products through approximately 60,000 retail stores in 45 countries. In addition, it distributes Brita water filtration systems in Israel. The company sells its products under the SodaStream and Soda-Club brands directly and through local distributors, as well as over the Internet. The company was formerly known as Soda-Club Holdings Ltd. and changed its name to SodaStream International Ltd. in March 2010. SodaStream International Limited has 1,600 employees and is headquartered in Airport City, Israel.

Exhibit 2: (B)(N) PEP PepsiCo Incorporated – Risk Price Chart

(B)(N) PEP PepsiCo Incorporated - June 2013

(B)(N) PEP PepsiCo Incorporated – June 2013

PepsiCo Incorporated is a food, snack and beverage company, which manufactures or uses contract manufacturers, markets and sells a variety of salty, convenient, sweet and grain-based snacks, carbonated and non-carbonated beverages and foods.

(Please Click on the Chart to make it larger if required.)

The Price of Risk

The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2009) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks. Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.

Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.

To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™“
Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.Disclaimer Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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