Primo Water and SodaStream both went public around October of 2010. At the time we posted a note comparing them entitled: Still or Sparkling?
So far it’s been sparkling by a landslide. Since their IPO at $12 Primo (PRMW) has declined to a mere $2.75/share while SodaStream (SODA) is up 60% from their IPO price of $20 and traded as high as $77 in early August before the company started to disappoint some investors.
Today Primo Water made an interesting announcement. They have formed an alliance with… wait for it… the Sparkling Drink Systems Innovation Center! The company has a fairly sketchy online presence and is based in Israel. It looks like something that was set up in the past week.
The even stranger part of it is that the deal comes after another transaction where Primo acquired the Omnifrio business which is a single-serve carbonation machine. The story is that Primo is going to build a business that combines their own machine with US and international distribution to play in the SodaStream space. However management has no skill in this market and their existing relationships and distribution networks are not as synergistic as they may appear on paper.
But Primo has to figure something out given the investor interest in homemade sparking beverages. Even high end restaurants are selling their own these days as “sparkling infusions.” I’m sure they love charging $6 for a bottle of their tap water with some fruit juice and bubbles mixed in. I’ve had the “watermelon soda” at The Gallows in Boston and will admit that it’s pretty refreshing.
The problem Primo is trying to fix is that their core business, filtered water and dispensing equipment, is okay but not very attractive. The company has done well and has a good business, strong distribution and good management. But it is a fairly asset intensive, low margin business. Someday the stock may run, especially if all the drilling for natural gas in the US makes bottled water a necessity rather than a luxury.
Because the business has gross margins of about 30% growth in sales will take longer to bring operating margins into positive territory. Most of the business plans rely on the company benefiting from their “razor and razor blade” business model which everyone is sick of hearing about and consumers are wise to these days.
Primo wants to sell “S-Cups” and the CO2 cylinders to consumers so they can make soda one cup at time as witnessed by the coffee industry. Companies like Nestle (Nespresso) and Green Mountain Coffee have focused on this area for years. If this market ever develops it would be very unlikely of for a water distribution company like Primo to pull it off.
SodaStream is hardly a blue chip growth stock but it appears to be a much more viable play on the market than Primo. SODA is presenting tomorrow (November 30) at the JP Morgan conference in NYC so investors attending may want to check out their side of the story.
Related articles
- SodaStream’s effervescent earnings (money.cnn.com)
- SodaStream puts a sparkle in Eden Springs November sales drive (prweb.com)
- SodaStream launches $2m Christmas ad push with pastiche of YouTube PlayStation clip (mumbrella.com.au)
{ 1 comment… read it below or add one }
wrong re SDS.
they re in business since 2004. they bought soda quick (founded in 1998) assets in 2009.
management was in soda stream before current management as they launched the French business.
so Primo has now the needed knowledge to make it happen.