Martin Costa had the opportunity to speak with a hedge fund manager with positions in both SODA and GMCR recently and we have provided an exert from the conversation.
Martin: When you analyze these two stocks, where do you see the differences?
Hedge Fund: There aren't as many as investors assume. With a razor/razor blade
business, the razors are usually very expensive, so they can only reach so
much of the market. There's a limit to how much market share they can
capture by sheer cost of the razor blades. I agree there are underlying
differences, but they may not be that significant in the grand scheme of
Martin: So are you depicting an end game or a ceiling in your investment thesis?
Hedge Fund: You have to. We aren't saying when it will happen, but eventually it does
with this particular business model given pricing.
Martin: Who is most at risk of reaching that ceiling in the future? What are you looking
at so far to identify this?
Hedge Fund: Its basic speculation, but you'd have to say Green Mountain. If they don't
find a profitable way to get beyond the U.S. then what do you have?
Martin: Are you of the opinion they can?
Hedge Fund: No, not given their gross margins. Where are they gonna find a
Manufacturer centrally located, let's say in Europe, that can build and ship
Keurigs to the region with any profit margin?
Martin: So why invest in SODA or GMCR if you feel there is only so much growth?
Hedge Fund: Anything can happen and a ceiling may not be reached for years. Right
now earnings and revenues are growing, can't ignore this to speculate
on when the downturn will come. What if they merger with a
conglomerate or get bought out or tomorrow announce another deal?
Martin: And SODA, at least with GMCR they are home-grown and without threat of
Regional conflict. Wouldn't you see more cons in SODA than GMCR?
Hedge Fund: On the contrary, SODA has much more room and years of growth ahead.
It's an early stage play on GMCR for those who missed out on GMCR in
2009. Regional conflict is part of the risk with SODA, but it's almost
always noise. They have never had a shut down or anything like that. You
want a con for SODA I'll give you one; it's a soda machine and its not a
coffee machine. I wake up in the morning and have a cup of coffee like
millions of people around the world. We don't wake up and have a glass
of soda. Some people physically need that cup of coffee.