After a Wild Ride, SodaStream Still Looks Like a Screaming Buy

By Kyle Farrah - June 25, 2012 | Tickers: KO, KRFT, MNST, PEP, SODA | 0 Comments

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This past month SodaStream International (NASDAQ: SODA) fell below $30 a share, nearing its 52 week low of $27.60. This is significantly below its 52 week high of $79.72, which it hit around this time last year. Despite the setback in share price, SODA has grown its top line by over 50% and its adjusted EPS by over 57% from the same period last year. The stock has been pummeled recently over fears that the carbonated home beverage maker was a fad and that its earnings growth was unsustainable. Soda Stream however has consistently beat earnings expectations and grown its top and bottom line over its history.

Why it’s down

There is a lot of skepticism on Wall Street over SodaStream’s ability to continue to grow as quickly as it has. Many are worried that this is a fad that will go the way of other kitchen appliances such as the waffle maker or countless juicing machines. Even the CAPS Community rates SODA as only a two star stock. However SODA’s most recent quarterly report tells a different story. While machine sales have only gone up about 15% since the first quarter of last year, CO2 refill units and flavor units have gone up 29% and 52% respectively. This shows that people are not only buying the machine, but they are also using it often enough to have to get refills. This shows that this trend has staying power.

Why it’s up

Recently analysts Monness, Crespi, Hardt & Co. reaffirmed their buy rating on the stock stating that SodaStream machines were flying off the shelves at Wal-Mart and that the company would continue to beat estimates in 2012. The shorts were forced to cover and the stock flew higher.

Why it should continue going up

SodaStream is expected to grow earnings at around 30% a year and is trading at only 14 times next year’s earnings. This gives SODA a price to earnings to growth (PEG) ratio of only about 0.50. Companies are generally considered to be fairly valued when they have a PEG of 1.00. This means that in order for SODA to be fairly valued the stock needs to double to $78 a share.

Competitors

As a provider of beverages SodaStream naturally competes against Coca-Cola (NYSE: KO) and Pepsi (NYSE: PEP). If consumers switch from purchasing Coke and Pepsi products to making their own soda at home these company’s earnings could be injured.

It may seem far-fetched to think that Coke and Pepsi could be affected by such a small company, (SodaStream’s market cap is only $780 Million compared to Coke’s market cap of $169 Billion), but just recently Coke sent SodaStream a cease and desist letter telling SodaStream to stop using Coca-Cola’s products in a marketing campaign. The marketing campaign that Coke was referring to consisted of large cages showing the number of bottles and cans used by the average household. SodaStream’s CEO, Daniel Birnbaum, responded to the order with the following statement:

"Further to recent reports of the cease and desist order issued to us by Coca-Cola in response to our Cage Exhibit in South Africa, we stand firm in our intention not to comply. We have more than 30 such exhibits around the world, which contain bottles, and cans collected from local garbage dumps and they serve to communicate a loud and clear message about waste generated by packaged beverages. If Coca-Cola claims to still own these bottles, then they should clean up their own garbage. Approximately 1 billion bottles and cans end up in our parks, rivers, oceans and garbage dumps every day worldwide---almost 400 million in America alone. Coke will not silence us with threatening letters."

As competitors Coke and Pepsi pose a risk to SodaStream but they also provide an opportunity. Right now SodaStream is a relatively small company that could easily be acquired by Coke or Pepsi. Coke or Pepsi may be worried about the potential risk of people switching from their products to SodaStream’s products. Right now the percentage of people using SodaStream is relatively small, but it is growing rapidly and has the potential to become really big. In Sweden 20% of households own a SodaStream machine, and SodaStream has sold over a million machines in that country already.

Additionally SodaStream seems undervalued at today’s prices so if Coke or Pepsi acquires the company they would be getting a rapidly growing company at a cheap valuation.

Partners

One of SodaStream’s weaknesses is the lack of branding. SodaStream’s drinks generally tend to be given very generic names. Their cola drink for example is named “Cola”. This blandness in naming, and lack of brand recognition is partly being dealt with. At the beginning of this year SodaStream announced a deal with Kraft (NASDAQ: KRFT) where SodaStream would be able to use some of Kraft’s brands including Crystal Light and Country Time. This would give SodaStream some brand recognition that might encourage customers to purchase their machine.

Comparisons

SodaStream is often compared to Monster Beverages (NASDAQ: MNST) because they are similar in many ways. Both companies are growing their earnings significantly each year, and they are both in the beverage industry, but their valuations are significantly different. Monster trades at a whopping 44 times earnings and has a PEG ratio of 2.43! This is significantly higher than Soda’s 24.5 multiple and PEG ratio of .53. Additionally SodaStream doesn’t have any real competitors that do exactly what it does, but there are three other major players in the energy drink industry. There is Coca-Cola’s Full Throttle and Pepsi owned AMP. Monster isn’t even the largest brand in the energy drink space. Red Bull controls the majority of the market. It will be difficult for Monster to maintain its margins amidst so much competition while still growing its top line growth as it has in the past.

SodaStream’s unique selling proposition

There is a reason for SodaStream’s massive success. Their products have three benefits that make people want to buy their machines. They provide better health, a cost savings to the conusmer, and are good for the environment.

Health – One serving of SodaStream has around a third of the calories of a can of soda, and significantly less sugar.

Cost – The initial purchase of the machine is expensive. The machines range from a low of $79.95 to a high of 199.95, however, once the initial purchase is made the cost to make a SodaStream beverage is slightly lower than buying individual cans and bottles. The flavor units cost $4.99 per bottle and make 50 servings and the CO2 refills cost around $15 at most locations. The CO2 refills can make 130 Liters of soda. This lowers the cost to well below 15 cents per drink.

Environment – 37 billion bottles of water are used in the U.S. alone every year. SodaStream eliminates much of this waste because SodaStream bottles are reusable. As mentioned earlier SodaStream uses the environmental effect of water bottles and cans heavily in it’s advertising which will help it continue to grow its customer base.

Where the stock will go

While no one can predict the future, I expect SodaStream to regain favor in the stock market. Based on the strengths outlined above, perhaps investors are just now catching on to the acquired taste of SodaStream's shares.

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