There's Huge Potential Growth in the Americas for SodaStream
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With all the recent news regarding the potential buyout of SodaStream (NASDAQ: SODA) by the beverage industry giants PepsiCo (NYSE: PEP) or Coca-Cola (NYSE: KO), one needs to keep an eye on whether or not that is even desirable. The home beverage machine maker still has tremendous growth left in the Americas, where soda consumption per-capita leads the world and greatly exceeds its home base of Western Europe.
SodaStream’s stock has surged from a low of $35 last November to a recent price exceeding $70, leading some investors to question if the move is overdone.
The opportunities in the Americas are vast, as countries like the US, Brazil, and Mexico leads the world in soda consumption. SodaStream still lacks household penetration of greater than 1% in any of these countries, whereas some established European countries such as Sweden have reached 25%. While the Europeans desire the home soda makers for environmental and aesthetic reasons that might not be matched on this side of the world, the actual demand for the syrups should exceed the limited amount drank in those countries.
The US is the largest soda market in the world, and the company only has a 1.1% household penetration rate there. Canada had a 1% household penetration and 70% year-over-year growth. Mexico has the highest per-capita soda consumption in the world, yet the company has no sales in that country. The plans are to establish a subsidiary and begin sales in early 2014. Brazil is the third largest soda market in the world with a 57 million household potential.
Americas revenue hit $48.3 million in Q1 2013 and already compares favorably to the $53.3 million from Western Europe. The impressive part is that the company has yet to fully build out any of the Americas markets with years of growth left. Another good note is that the growth rate of the established European markets is a strong 17%.
Last week rumors were flying that PepsiCo would purchase SodaStream in a deal valued up to $2 billion, or $95 per share. Plenty of reasons exist as to why that rumor might be flawed, especially considering that PepsiCo flat out denied it. In reality, it could be Coca-Cola that is working on a deal, or either beverage giant might be working towards a partnership instead. Typically these rumors have a solid reason for coming to light whether all the details are accurate or not. Neither company can deny the weakness in the core soda markets nor the advantages ownership of the premier machine maker could provide the buyer over the other company.
Neither Coca-Cola nor PepsiCo can afford for SodaStream to become a household name in the Americas. Right now, analysts only expect Coca-Cola to grow revenue 1.1% this year, and PepsiCo isn't expected to do much better at 3.4%, and that's with growth from emerging markets and Frito Lays brands producing the higher numbers. The major drawbacks for the behemoths would be that a home beverage maker would compete directly with the existing business line that is highly profitable. Conversely, neither can let the other company control that business line. Some revenue is better than none.
The deal, while attractive with the stock trading at around $70, shouldn’t be seen as the ideal option for SodaStream investors. The company has guided towards non-GAPP earnings that could easily reach $3 in 2013 and jump to $4 in 2014. At that level, $95 by the end of 2013 doesn’t appear to be an aggressive estimate.
Rumors typically come to light for a reason. One of the companies might want to test the market perception of a deal or certain information has been abstracted from meetings that might be flawed. Either way, investors in this fast growing home beverage maker shouldn’t be flooding the streets to accept a deal at these levels.
With the large soda markets in the Americas hardly tapped and earnings surging, investors have no reason to cash out now. A market cap in the $5 billion to $10 billion range could be more reasonable when household penetration approaches the 5% level in the US, Brazil, Canada, and Mexico. There's no reason to abandon ship now when vast growth potential exists.
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.
Mark Holder and Stone Fox Capital Advisors, LLC own shares of SodaStream. The Motley Fool recommends Coca-Cola, 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!