Short Sellers You've Been Warned

By Chad Henage - August 29, 2012 | Tickers: KO, MNST, PEP, SODA, WMT | 0 Comments

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I'm not sure what more SodaStream (NASDAQ: SODA) can do to prove itself. In one of my first posts for the Motley Fool Blog I suggested that short-sellers were crazy to bet against this company. Multiple times the company has reported earnings that exceeded expectations by a significant amount, and yet the stock is just barely higher than where it was a year ago. SodaStream's business is relatively easy to understand but many people believe the company's product is just a fad. Let's take a look at the “fad” claim and take a walk through the company's most recent earnings report.

This Isn't a Fad

Most investors would jump at the chance to buy shares in a company that is: growing at 30%, has beaten earnings estimates by almost 27% on average in the last 4 quarters, and is selling for just over 16 times forward earnings estimates. This is exactly what SodaStream offers investors at this time, yet the company can't seem to shed the idea that this business is a fad. What's interesting is, the company participates in some markets that have had access to SodaStream products for 17 to 20 years. Those same markets are still seeing significant growth in both soda makers and consumables. A company that is able to maintain sales growth for 17 to 20 years could hardly be called a fad. However, this misconception is causing a valuation gap between SodaStream and their competition.

Huge Valuation Gap

Investors looking for excellent top and bottom line growth in the soda industry should look no further than SodaStream. Take a look at the difference between the P/E ratio and growth rates of SodaStream versus their competition and you can clearly see the apparent value in the company.

Granted, there are several reasons that investors are willing to pay more for the more established names of Coca-Cola and PepsiCo, and many people expect Monster to grow at a rate faster than 15%. However, none of these factors is enough to make up for the fact that SodaStream sells for just over half its expected growth rate, versus most of its competition sells for more than twice their expected growth rates.

Significant Growth

In the current quarter, revenue jumped 49.1% and adjusted diluted EPS was up 36.84%. In fact, one concern that investors had a few quarters ago was the company's sales of Soda Maker Starter Kits seemed to slow down. This issue has hopefully been put to rest as the current quarter saw a 20% increase in the number of units sold. As proof that consumers are not only purchasing the starter kits, but then continually using them, the company showed an increase of 25% in CO2 units and a 19% increase in flavor unit sales.

Faster Growth is Coming

Where the company's geographic sales results are concerned, there is a shift occurring in the dominant region driving SodaStream's revenue. Western Europe accounts for just over 50% of total revenues and saw 25% revenue growth. However, The Americas region is becoming a bigger part of the sales picture. In fact, sales in The Americas accounted for 29.81% of total revenues versus 21.27% last year. This is very good news for investors as sales in this region increased 109%. Asia-Pacific also looks promising as this region just launched in late 2011 and revenues were up 234% in the current quarter.

Another factor that should lead to better growth going forward is, the company just began in late July a CO2 exchange program at Wal-Mart (NYSE: WMT). This is significant as this relatively new retail relationship gives SodaStream customers thousands of new locations at which to exchange their CO2 cartridges. Last but not least, the company expects to begin introducing its SodaCaps beginning in the first quarter of 2013. For those who don't know, SodaCaps resemble K-Cups, except instead of being filled with coffee they are filled with drink flavoring. This should allow customers to get consistent flavoring which has historically been a gripe about the system.

The Future

As if the company's current results weren't impressive enough, SodaStream also increased its revenue and net income projections for the full year. The company now expects revenue to increase approximately 40% and net income is expected to increase 55%. While this is impressive, one of the most telling comments from the company's conference call was in relation to the company's co-branding relationship with Kraft. In response to a question about future co-branding opportunities the comment was, “we're in discussions with tier 1 brands across various categories in beverage land. And you should expect to hear more announcements on this in the future.” This was particularly interesting to me as the company seems to be giving away that another co-branded partnership is on its way. With one of the biggest knocks on the company being the lack of branded beverages, adding an additional beverage name brand would further allay the fear that this might just be a fad.

Conclusion

As you can see, SodaStream not only produced impressive top and bottom line growth, but there are clear growth drivers going forward. For investors who would say that Coca-Cola, PepsiCo, or others operate in a different league than SodaStream, I would suggest they look at each company's gross margin. Since the company's gross margin is one way to determine the efficiency of the business model, it's interesting that only Coca-Cola had a higher gross margin in the current quarter than SodaStream. Even with their better distribution and better brand names, PepsiCo and Monster both produced a gross margin of just under 52%. By contrast, SodaStream's gross margin rose from 53% last year to 54.4% this year. With the company also showing positive free cash flow, and projecting positive free cash flow going forward, this is yet another factor investors should consider when deciding whether SodaStream deserves a spot in their portfolio. For long-term investors the story keeps getting better with each earnings report, and for short-sellers the chance for a squeeze seems inevitable.

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