This Is Just The Beginning
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I'm going to make a statement that many people will say is crazy: SodaStream (NASDAQ: SODA) is the only beverage stock you should buy. For those of you still reading, look at what is happening with the company. SodaStream is showing huge growth, and the stock sells for a significant discount relative to its peers. Just like blind taste test results surprise some people, if you look at SodaStream and compare the company to the big boys of the industry, the choice is simple.
I'm fully aware of the number of people that think SodaStream is a fad product. I'm also aware that some people think that this product only appeals to people who drink tons of soda. What I'm here to tell you is, this system appeals to many people, and the company is just getting started. The beverage industry is dominated by the two biggest brands, Coca-Cola (NYSE: KO) and PepsiCo (NYSE: PEP). Each of these companies offers a huge selection of sparkling and still beverages, and they make tons of money selling their goods. The difference between Coke, Pepsi, and SodaStream is pretty simple. SodaStream is offering something to customers that the other two couldn't care less about.
SodaStream offers the ability to make your own beverages, avoid the huge number of plastic bottles and aluminum cans, the trips to the store, and having to store all of these items. Instead, customers can have multiple choices in much smaller containers. They can use re-usable bottles that are designed to keep their beverage fresh for longer. They can avoid as many trips to the store, and as a kicker, most of SodaStream's flavors offer better nutritional content compared to their competition. Did I mention the company sells these goods like wildfire?
SodaStream has been regularly crushing analyst estimates. In the company's last earnings report, total revenue jumped 48.7%, while diluted EPS increased more than 66%. The company's largest geographic region is Western Europe, which accounts for just over 52% of total revenues. Even with all of the turmoil in this part of the world, sales were up 33%. The company's largest near-term growth opportunity is the Americas. Sales in this region jumped 61% and now represent almost 32% of total revenue. In the future, the company's growth will be helped tremendously by the Asia-Pacific market, which saw sales rocket up 145%. The most amazing part is that SodaStream achieved these results without the benefit of their new flagship offering called Source, and without a global branding campaign.
Why should investors buy SodaStream instead of their competition? Quite simply it comes down to valuation. SodaStream's stock is dirt cheap relative to their growth prospects. I believe that both Coca-Cola and PepsiCo sell for their current valuations based on their brand, and their dividends. Both companies pay yields above 2.7%, and both companies are known the world over. However, Pepsi is expected to grow earnings by just 4.3% and Coca-Cola is expected to grow earnings by 7.94% in the next five years. Considering that both companies sell for a forward P/E ratio of over 16, this gives Coke a PEG of 2.12, and PepsiCo a PEG of 3.73. By comparison, SodaStream's PEG is 0.59. The company sells for less than 18 times forward estimates, but EPS is projected to grow by better than 30% in the next few years. As you can see, there is a huge disconnect between SodaStream and their two largest competitors.
Many investors would suggest that Coca-Cola and Pepsi deserve their higher valuations due to their huge margins. If that's the case, then SodaStream is undervalued by this measure as well. Coca-Cola leads the pack (pun intended) with a gross margin of 60.67%. PepsiCo has a respectable gross margin of 52.96%. If you are expecting SodaStream to come in lower, you are about to be disappointed. SodaStream reported a gross margin of 54.2% in their most recent quarter. In addition, the company has been buying the rights for direct distribution in different geographies. This allows SodaStream to more directly control distribution costs, and has improved their margins in the past. When you look at the above PEG ratios, and consider that SodaStream's gross margin is better than PepsiCo's and just less than Coca-Cola, it's hard to argue that the stock isn't undervalued.
As you can see, by at least two different measures (PEG and gross margin), SodaStream appears undervalued relative to its competition. The company's higher guidance for 2012 in its last earnings report also argues for continued strength in the stock. For a company that is growing by leaps and bounds, selling for just over half its growth rate and beating expectations, I don't know why you would buy another beverage stock. I know Coke and Pepsi are world class brands, but at this point SodaStream is the much better value. The near 40% increase in the last couple of months is just that start. The company's next earnings report should be huge, as SodaStream was popular last holiday season, and the product was in thousands more stores this year. Think about that for a minute while you are placing your buy order.
MHenage owns 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!