SodaStream In Partnership With Samsung - Stock a Bargain at Current Price

Nauman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Airport City, Israel-based SodaStream International (NASDAQ: SODA) has recently announced that sparkling water dispensers using its proprietary system will be available in refrigerators built by Samsung. The news of Samsung Electronics producing a new refrigerator incorporating a SodaStream carbonated water dispenser was applauded by investors, hoping that a partnership with the Korean company, which controls more than 13 percent of the worldwide refrigerator market, will help SodaStream beat analysts' revenue estimates this fiscal year. SodaStream is expected to report record sales of $425 million for the fiscal year 2012 -- when the company reports earnings this week.

The four-door appliance will be sold in the U.S. starting from April. Refrigerator consumers will be able to select up to three levels of carbonation for their sparkling water. The dispenser uses a standard SodaStream 60L CO2 cylinder that rests in a small concealed area inside the left refrigerator door, which is easily accessible to change when empty. I believe, this agreement with Samsung will have a significant impact on the long-term sales of SodaStream -- the more convenient it is for customers to make their own sparkling water, the more they're going to use SodaStream. Moreover, the product won't require additional adjustments as SodaStream's standard gas canisters can easily be used in the new Samsung refrigerators.

SodaStream Current Valuation

SodaStream trades at 25 times trailing earnings. Analyst expectations are for $2.75 in EPS for the current fiscal year, and the current stock price of $52.32 is 19 times that figure, in-line with the company's industry peers. SodaStream has stable cash flow generation, and when I look at the enterprise value implied by the current stock price, it is 19x trailing EBITDA, slightly higher than the rest of the industry.

SodaStream P/S is 2.75, a surprisingly low multiple for a growing firm: The Coca-Cola Company (NYSE: KO) trades at 3.60 times sales and Monster Beverage (NASDAQ: MNST) trades at 4.75 times sales. Given, SodaStream revenue is growing at an impressive pace, it deserves a much higher multiple than that.

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SodaStream is not a mature company, it's a growth stock. Trying to forecast future profitability based on recent profits would be difficult. Today's profits and free cash flow aren't meaningful indicators of what things will look like in the future. Profits do however, eventually follow sales, and are far less volatile and easier to predict. So using the current P/S ratio we can calculate how much the stock will be worth if things continue to go the company's way.

Assuming SodaStream continues to grow sales at the management's projected growth rate of 20% for another three years, and the market continues to give it a low 2.80 P/S multiple, by the end of 2015 the price of the company will be around $2 billion or almost double from the current level. In other words, the stock is priced for more than 30% annualized returns if you buy at the current share price, assuming sales grow as stated.

The Bottom Line

In short, SodaStream is substantially undervalued compared to its peers. It is my view that the risk to SodaStream's fundamentals are overwhelmingly skewed to the upside, which presents a very clear and intriguing investment opportunity on the long side. If you really think SodaStream is the next big thing, then now is the time to initiate a long-term position.

MaaniValueGuru has no position in any stocks mentioned. The Motley Fool recommends SodaStream. The Motley Fool owns shares of SodaStream. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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