SodaStream Keeps Up Its Profit Stream
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Soft drinks have gained a bad health reputation because of the high levels of sugar they contain, yet customers remain attracted to carbonated beverages. SodaStream (NASDAQ: SODA) offers a customer a healthier alternative, allowing a customer to create his own carbonated drinks from fruits he picks in his yard, or fresh juice he keeps in his refrigerator. As health advocates condemn the traditional soft drink industry, SodaStream has the potential to gain customers who switch to carbonated fruit drinks.
SodaStream's other main selling point is that a customer who makes soft drinks at home does not need to purchase environmentally detrimental plastic bottles. Some cities, especially coastal cities, discourage the use of plastic by banning plastic bags or charging an extra fee for their use, and plastic bottles often have an additional redemption charge added to their retail price. If cities toughen their laws on plastic bottles, this could provide an additional boost to SodaStream sales.
SodaStream's business model does have a vulnerability, as the company sells its soda machines at lower prices so it can gain steady income from drink syrup sales. If health conscious consumers create their own drinks, SodaStream will not earn as much revenue from its drink syrups, although it can still profit by selling carbon dioxide container refills. SodaStream did create a natural line of syrups in 2010 to address this problem, showing that the company is paying attention to customers' health concerns, offering products without corn syrup and other additives.
SodaStream stock is very popular with short sellers, and more than half of the float is held short. Many investors believe that SodaStream can not maintain its rapid growth. When the company announced its financial results for the quarter, its share price dropped significantly, even though its gross margin and earnings both increased, as the company did not show as much growth in soda machine sales as investors wanted.
Shorting a company that showed a 32 percent quarterly revenue gain and a 21 percent quarterly income gain over 4Q 2010 seems very risky, especially when the company reported a 70 percent quarterly revenue improvement in the Americas. It would not be surprising if SodaStream reported good results next quarter and the shorts were forced to cover, and many investors have purchased calls. The company is based in Israel and made many of its sales in Europe, and many potential soda machine buyers in the United States have still not heard about the company. At a price to earnings ratio of 29.10, investors expect significant growth from SodaStream, and the company has the potential to provide it.
Green Mountain Coffee (NASDAQ: GMCR), like SodaStream, makes machines that offer an alternative way to consume beverages. Although some separate external market factors, such as the price of coffee beans, influence Green Mountain's sales, both companies are growth oriented beverage machine manufacturers, and Green Mountain trades at a fairly high 34.59 price to earnings ratio. Short sellers remain interested in Green Mountain, although its shares have not been shorted as much as those of SodaStream, but Green Mountain coffee machines remain popular with shoppers -- the company successfully introduced higher end coffee machines recently, demonstrating the effectiveness of its business model. Both Green Mountain and SodaStream showed strong earnings recently and offer potential for future growth.
Green Mountain and SodaStream have both shown solid growth in the past, and short sellers have bet against them anyway. I think that both of these companies will continue to attract shoppers and report strong earnings growth when they announce their financial results next quarter, proving the short sellers wrong and forcing them to cover.
Motley Fool newsletter services recommend Green Mountain Coffee Roasters and SodaStream. The Motley Fool has no positions in the stocks mentioned above. enovinson has no positions in the stocks mentioned above. 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.