The Market is in Denial

By Brian Shaw - August 23, 2012 | Tickers: KO, KRFT, SODA, WMT, WFM | 0 Comments

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The market just doesn’t want to like SodaStream (NASDAQ: SODA).  

That fact is made painfully obvious by the staggering 60% of SODA’s public float that was sold short as of the end of July.  The reasons for this negative sentiment are typically the opinions that the SodaStream concept is a fad and that the company is a house of cards waiting to implode.

Hold on Just a Minute!

Apparently, the market believes these opinions are so solid that they are worth following despite a tremendous volume of contradictory data, not the least of which is the company’s most recent earnings release.  SodaStream beat analyst expectations on both the top and bottom lines and raised its full year guidance (again).  Management now expects full-year revenue to increase 40% and net income to increase 55% over last year.  Despite these positives, SodaStream’s shares are down approximately 5% since the earnings release less than two weeks ago.  Here is how the company is valued today: 

The number in the table above that really jumps out at me is the PEG ratio.  Analysts expect SodaStream to grow 30% per year over the next five years, which based on the current P/E of 23.74 creates a very attractive PEG ratio of just 0.79.   So, there seems to be a disconnect between the analyst sentiment and the market’s perception of SodaStream.  Analysts estimate that high-growth company like Chipotle Mexican Grill and Lululemon Athletica will grow at a rate less than SodaStream, yet those companies trade with TTM P/E multiples of 36 and 46, respectively.  For reference, applying a comparable valuation of Lululemon Athletica's P/E ratio to SodaStream would yield a share price of $75, almost double today’s price.

Now, I’m not saying that shares of SODA should trade at $75 today.  However, it is interesting to read between the lines and see that analysts do, in fact, appreciate the growth potential of SodaStream, yet the market does not.  When you look at just how broad the growth opportunities are for SodaStream, 30% annual growth might even be a little conservative.  Here are several of the growth engines to keep an eye on:

• The U.S. Market – SodaStream reported 109% growth in the Americas in its most recent quarter, but there is still significant room to grow in the U.S. as SodaStream expands distribution.  In May, SodaStream added 2,900 Wal-Mart (NYSE: WMT) locations and has reported tremendous success thus far.  Next in line for SodaStream’s U.S. expansion will be grocery stores and pharmacies.  SodaStream expects to run some tests in 2013 before rolling out offerings in grocery stores in 2014.  In fact, SodaStream is already in a couple of Whole Foods Market (NASDAQ: WFM) locations; with this existing relationship and the “healthier” soda options that SodaStream touts, Whole Foods may be a logical first grocery chain to roll out SodaStream products. 

• International Expansion – SodaStream has just scratched the surface of the potential market outside of Western Europe and North America.   Revenues in Asia grew 234% in Q2, but were still only $10 million during the quarter.  In 2013, SodaStream plans to expand to Greece and India.

• New Flavors – The recent expansion of SodaStream’s partnership with Kraft (NASDAQ: KRFT) has brought the Kool-Aid brand to SodaStream in addition to Crystal Light and Country Time.   These brands will not only propel the popularity of SodaStream’s product, but also open the door for future partnerships.  Dr Pepper Snapple, perhaps?

• New Products – Innovation is critical in order for SodaStream to further boost growth and stay ahead of any competition that may arise.   A great example is the upcoming release of “SodaCaps” later this year; SodaCaps will add a single-serve offering to SodaStream’s product portfolio. 

• Brand Awareness – As consumers increasingly become aware of SodaStream’s products, the appeal of one or more aspects of SodaStream’s value proposition -- “No Lugging, No Storing, No Empties, Great Value” -- will generate new customers.  These four components are appealing to a wide range of consumers, from customers living in an apartment in New York City where space is at a premium and hauling soda up multiple flights of stairs is a pain (literally!) to environmentally conscious consumers who want to help “save the world from bottles”; to date, SodaStream claims it has saved the world from almost 2 billion bottles per the counter on its website.

• No Competiton – While SodaStream has plenty of competition from legacy bottled soft drink makers Coca-Cola (NYSE: KO) and PepsiCo, there haven’t been any serious competitors in the home soda making market.  This will likely change through some combination of kitchen appliance makers and possibly even Coca-Cola and Pepsi, but SodaStream clearly has a first move advantage.  As a side note, don’t expect Coca-Cola to partner with SodaStream anytime soon.  The two companies are in the midst of an interesting battle initiated by SodaStream’s creative marketing.

As summarized above, the growth opportunities for SodaStream are both numerous and diverse.  When you combine recent momentum from strong results, further growth potential, a pristine debt-free balance sheet and a very reasonable valuation, the result is a very attractive investment opportunity.   

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