Why Do Analysts Keep Getting SodaStream Wrong?

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As quickly as SodaStream (NASDAQ: SODA) finally gained some strong interest from the market, the analyst community smashed the stock with downgrade after downgrade. The company continues to under promise and over deliver, with results beating expectations quarter after quarter. The stock, though, has plunged $18 in the last month and now trades at less than its growth rate that has been reaching over 30% lately.

The company is a leading manufacturer of home beverage carbonation systems sold at major retailers around the world with a primary target of growing in the Americas where soda usage is significantly higher than in Western Europe. The stock recently surged as traders thought Coca-Cola or PepsiCo would make an offer. As that theory has unraveled lately, analysts and the media have started hitting the exit button, providing yet again another attractive entry point.

The stock has historically traded at sub-growth rate multiples for various reasons, whether from the company originally reporting in Euros or the current focus away from adjusted earnings. The question is, whether the stock will reach multiples compared to its historical and projected growth rates, or will it remain at a cheap valuation that appears crazy.

Several darling stocks have lower expected growth rates, yet trade at massively higher valuations. As an example, both Noodles & Company (NASDAQ: NDLS) and Green Mountain Coffee Roasters (NASDAQ: GMCR) trade at higher multiples, yet offer lower growth rates.

Analyst downgrades

After huge gains in early May, both Deutsche Bank and JPMorgan downgraded the stock with price targets around $70. At the time, it stopped the rally in the stock momentarily until the buyout rumors helped shoot the stock up to as high as $77.80.

Now, another analyst and a media outlet have turned sour on the stock, sending it back to very cheap valuations for an exploding growth stock. First, on July 9, The New York Post claimed neither Coca-Cola nor PepsiCo are interested in buying the company. Second, on July 12, Oppenheimer cut the rating on the stock down to "Perform," apparently on thoughts that earnings could be volatile for the rest of the year. It previously had an $85 target on the stock that it removed.

Talk about a couple of news items with no apparent value to any long-term investor yet destructive to the stock in the short-term.

Substantial positive guidance

The key to investing in SodaStream or any other stock is understanding the potential so that an investor can react when news damages the stock price.

The company provided updated guidance for 2013 in the Q1 2013 earnings report that should’ve attracted investors to prices much higher than the current level. It guided towards revenue surging 27% above the $436 million reported for 2012. More importantly, the adjusted earnings were targeted at 27% above the $50 million reached last year.

Even though last year's results suggest the company will dramatically increase earnings beyond the original 25% and updated 27% growth rates, the above analysts don’t appear to see it that way. Based on the $50 million of adjusted net income last year, only a 30% gain would provide the company with $65 million of income. Based on 21 million shares outstanding, the company would earn over $3 in 2013 alone.

Relative valuations

When comparing SodaStream to other fast growing stocks, the valuation doesn’t add up for a reason to downgrade the stock. A perfect example is the recent Noodles IPO where the stock has slower growth, a smaller revenue base, yet a similar market cap. Sure, Noodles has the ability to grow the store base for years, but SodaStream is now penetrating the soda crazy North American markets of the U.S. and Mexico. As an investor, would you rather own another fast-casual dining concept or a revolutionary method of making soda?

On the other hand, Green Mountain Coffee is already worth $10 billion and faces intense competition in the single serve coffee market that it dominates. The stock, though, trades at 19 times forward earnings with a lower expected long-term growth rate. SodaStream has growth exceeding 30% while trading at what could be only 15 times forward earnings. It doesn’t add up that an investor would buy Green Mountain Coffee at its growth rate while only paying half the growth rate for SodaStream.

Conclusion

Assuming the current growth rates, it is very possible that SodaStream could earn nearly $4 in 2014. With the stock only trading at 15 times those earnings, the recent and continuous analyst downgrades don’t add up. The long-term growth rate is listed at 25% and the company continues growing in the 30% range, suggesting the stock should be much closer to $100 than $50.

While the relative comparisons to Noodles and Green Mountain Coffee won’t matter if SodaStream was to disappoint as Oppenheimer ponders, if the company keeps growing at a fast clip as expected, investors will be disappointed they didn’t scoop up shares on the current sell off.

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Mark Holder and Stone Fox Capital Advisors, LLC own shares of SodaStream. The Motley Fool recommends Green Mountain Coffee Roasters and SodaStream. The Motley Fool owns shares of 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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