This Stock Could be a Double

By Kyle Farrah - July 16, 2012 | Tickers: KO, KRFT, PEP, SODA, WMT | 0 Comments

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Last week I wrote up a piece on SodaStream International (NASDAQ: SODA) here.  Today I will discuss why I think it can double to its 52 week high of $80 a share within the next two years.

… but first a bit of history

From its IPO in late 2010 shares of SodaStream immediately skyrocketed. The company went up from its IPO price of $20, rose and consolidated three times, and finally culminated in a parabolic run-up to $80 a share in the end of July 2011. After hitting $80 a share, shareholders began to realize that the stock had run-up too far too fast. Earning’s expectations were too high. Owner’s sold their shares, and shorts piled into the company, forcing the stock to decline by over 50%, to $35, over a period of four days. Since then the stock has bounced around between $45 and $30 a share.

Growth and Valuation

SodaStream is currently priced at a multiple of 23.16 times TTM earnings. This year’s earnings are expected to be $2.17 a share, with next year’s earnings expected to grow by 24.88% to $2.71 per share. Analysts are expecting a five year growth rate of 30%. To make things even better SodaStream has consistently beat earnings by double digits for each of the last four quarters.

Given earnings per share of $2.71 and a 30% growth rate the stock would need to be priced at $81.30 per share to trade at a price to earnings to growth (PEG) ratio of 1.00. Any increase or decrease in actual earnings would skew the price per share, however given SodaStream’s tendency to beat the estimates, it is much more likely that SodaStream will outperform the EPS estimates, giving the company an even higher valuation.

Why SodaStream should Outpace Estimates

SodaStream recently put their product in Wal-Mart (NYSE: WMT) stores, giving the company another outlet to reach customers. Machine sales have outstripped both Wal-Mart’s and SodaStream’s estimates, and many Wal-Mart locations are running out of SodaStream’s products. Wal-Mart’s website has now completely sold out of SodaStream’s products. Despite this recent, massive success, only one of the four analysts covering the stock has raised estimates over the past 30 days. It is likely that EPS estimates will be raised leading up to SodaStream’s August 8^th Quarterly Report.

Another source of outperformance may come from SodaStream’s partnership with Kraft (NASDAQ: KRFT). SodaStream announced a deal with Kraft at the beginning of the year that would allow the company to use some of Kraft’s brands, including Country Time and Crystal Light. As SodaStream’s relationship with Kraft expands, more of Kraft’s products may be available for SodaStream to use. This will likely give potential customers a stronger confidence in SodaStream as a brand, and provide the company with a level of credibility that could potentially shake off SodaStream’s image as a fad kitchen appliance.

In addition to the Kraft partnership, SodaStream would look to benefit from a potential partnership with either Coka-Cola (NYSE: KO), or Pepsi (NYSE: PEP). If a deal was announced it would allow SodaStream to use either the “Coke” brand or the “Pepsi” brand instead of SodaStream’s generic “Cola” name. This would help to bring further credibility to SodaStream, and would help sway customers into buying a machine. Given the fact that SodaStream's largest markets are outside of the U.S., Pepsi may want to partner with SodaStream to get more international exposure to compete against Coke's international market dominance. Coke on the other hand has great international exposure, and a high market saturation. They may be interested in partnering with SodaStream as a way to tap into another market for growth.

It is also possible that SodaStream could be acquired by either Coke or Pepsi outright. The company has a solid balance sheet with no debt to speak of and over $50 million dollars in cash. SodaStream as a stand-alone company provides an excellent valuation, and the brand and distribution synergies that could be created by an acquirer would make the deal even more attractive to Coke or Pepsi. Additionally even if one of these companies doesn’t necessarily have a direct interest in SodaStream it may make strategic sense for them to purchase the company in order to keep their competitor from purchasing it. Finally both Coke and Pepsi have strong cash positions, making SodaStream’s sub-billion dollar market cap an easy acquisition should either one of these companies want to buy the company.

Conclusion

SodaStream may just be beginning to retrace the high’s it made in late July of last year. At today’s levels SodaStream looks like an excellent value that could see substantial share appreciation in the near future. With a foreword looking PEG ratio of less than .5, a strong management team in place, and a clear plan for growth in the near future, I expect SodaStream to at least double from its current share price within the next two years.

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