Should Investors Buy SodaStream Now?

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

SodaStream (NASDAQ: SODA) has experienced significant gain since November 2012, from around $33.50 per share to more than $71 per share. The stock has gone up a lot even after PepsiCo (NYSE: PEP) denied the rumor that it was interested in acquiring SodaStream for around $2 billion. Is SodaStream is a good buy after its significant gain on the market? Let’s find out.

A fast growing business with expensive valuation

SodaStream is the maker and seller of home beverage carbonation systems, including soda makers and exchangeable carbon-dioxide cylinders through more than 60,000 retail stores in around 45 countries, under SodaStream and Soda-Club brand names. Most of its revenue, $113.3 million, or 54.4% of the total 2012 revenue, was generated from Consumable products while Soda makers and exchangeable CO2 cylinders produced around $87.2 million in sales.

In the past five years, SodaStream has experienced great growth in both top and bottom lines. Revenue increased from $139 million in 2008 to $436 million in 2012 while net income jumped in a huge way, from $1 million to $44 million during the same period. In 2012, its EPS came in at $2.09. What I also like about SodaStream is its conservative capital structure.

As of March 2013, it had $287 million in equity, $50 million in cash, and only $8 million in short-term debt. The intangible assets were only around $42 million. Consequently, its tangible book value was $245 million. SodaStream is trading at around $71.80 per share with a total market cap of $1.5 billion. The market values SodaStream quite expensively at 22.3 times its forward earnings.

The Frito-Lay business is PepsiCo’s largest income source

According to Haaretz, the publisher of Beverage Digest, John Sicher doubted the rumor because the deal would have disappointed PepsiCo’s bottlers, which take care of PepsiCo’s beverage distribution. Even with the potential synergy between the two companies, I personally think that a $2 billion price tag would be quite a high valuation. Previously, when activist investors Nelson Peltz accumulated around 1 million shares in PepsiCo and 40.3 million shares in Mondelez International (NASDAQ: MDLZ), the investment community speculated the push for a merger and/or spin-off between the two companies.

Although investors often think of PepsiCo as a soft drink company, its biggest profit source was its food business, Frito-Lay North America. In 2012, Frito-Lay North America delivered nearly $3.65 billion in operating income.

Mondelez, the food leader in emerging markets

Mondelez, the owner of Cadbury, Oreo, Chips Ahoy, and Dairy Milk, is the leader in many food categories including Biscuits, Chocolate, Candy, and Powdered Beverages. Interestingly, Biscuits and Chocolate were its two biggest revenue contributors, with $11.15 billion and $9.36 billion, respectively, in 2012 revenue. Mondelez’s main playing ground is the BRIC region (Brazil, Russia, India, and China).

In the first of quarter 2013, Mondelez managed to deliver double-digit growth in China, Brazil, and India. Mondelez expects to produce around $1.55 to $1.60 per share, with estimated organic revenue growth of around 5% to 7%.

Mondelez and PepsiCo have similar earnings valuations, which is lower than the valuation of SodaStream. PepsiCo is trading at around $81.80 per share with a total market cap of $126.5 billion. The market values PepsiCo at 17.13 times its forward earnings. Mondelez is a smaller company with nearly $53 billion in total market cap. At $29.70 per share, Mondelez is valued at 17.1 times its forward earnings. In terms of dividend yield, investors might like PepsiCo the most with the highest dividend yield at 2.80%. While the dividend yield of Mondelez is lower at 1.80%, SodaStream has not paid any dividends yet.

My Foolish take

Among the three companies, I like PepsiCo the most because of its strong position in the soft drink market, a profitable food business, and a reasonable forward earnings valuation. Moreover, it offers the highest dividend yield of the trio. SodaStream, with its quite high earnings multiple and no dividend payment, does not interest me much at its current trading price. 

SodaStream's carbonation technology sounds simple, but this razor-and-blade company offers an intriguing opportunity for growth that could very well disrupt the soda industry. The Motley Fool's premium report on SodaStream explains the opportunities as well as the risks in the company. The report comes with a year’s worth of updates, so just click here to get started.

Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends PepsiCo and SodaStream. The Motley Fool owns shares of PepsiCo and 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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