Will This Beverage Company Ever Dominate?

William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After looking at SodaStream’s (NASDAQ: SODA) popularity both with Wall Street and the consumer, questions started popping into my mind such as: Will SodaStream supplant beverage giants like Coca-Cola (NYSE: KO), Pepsi (NYSE: PEP), or Dr. Pepper (NYSE: DPS)? Can SodaStream form strategic alliances with powerful businesses to gain momentum? Will the consumer abandon “finished products” in a can or bottle in favor of a more environmentally friendly reusable product? Does SodaStream possess staying power? A look at SodaStream from the perspective of strengths, weaknesses, opportunities and threats will help you arrive at answers to these questions.

The company

SodaStream sells do-it-yourself machines and accessories such as refillable CO2 cylinders that turn flavoring and ordinary water into a carbonated soda beverage much like Coca-Cola, Fanta and Pepsi or a sparkling flavored water of your choice.

Strengths

Customized fun – With a SodaStream system you can mix and match various flavors to make your own drink. For example, you can mix a cherry-cranberry-raspberry drink or a ginger ale root beer.

Low cost - According to SodaStream’s 2011 form 20f, excluding the cost of the machine, a liter of carbonated soda costs around $0.65 versus the price range of $1.30 to $1.79 for a finished Coke, Pepsi, or Dr. Pepper product in the convenience store.

Health benefits – SodaStream claims lower calories for its beverages. This serves in dissuading health concerns. For example, Pepsi, Dr. Pepper, and Coca Cola rate at 100 calories for an 8 fl. oz. serving versus 34 calories for SodaStream Cola and 37 calories for SodaStream Dr. Pete.

It’s green – Consumers making carbonated soda beverages at home and utilizing refillable bottles means less disposable plastic bottles going into landfills, appealing to an increasingly environmental and space conscious market base.

Retail relationships – SodaStream’s products are sold by a variety of retailers from Staples to Wal-Mart.

Convenience – Consumers living in the city enjoy the convenience provided by SodaStream. Packing a tiny bottle of syrup lightens the load of groceries for those who need to carry it onto the bus and then up the stairs to an apartment or flat. In addition, reusable bottles save on precious apartment space taken up by disposable bottles. Conversely….

Weaknesses

Inconvenience – For some consumers, the convenience of buying a “finished product” makes more sense. After finishing a shift at work the consumer may want that finished soda NOW. Waiting an hour to get home from work and then spending time making the soda doesn’t seem appealing.

Not proven – Looking at SodaStream’s income statement, revenue and net income grew a robust 45% and 72% per annum respectively 2009-2011. Moreover, cash abounds with low debt on SodaStream’s balance sheet in its most recent quarter with cash to stockholder’s equity registering at 20% and total debt to equity at 44%, which is below my personal threshold of 85%. The numbers are excellent until you arrive at the statement of cash flow.

SodaStream’s operating cash flow dipped into the negative range in 2010 and 2011; the very years it issued stock. On the balance sheet, days accounts receivable outstanding (or the amount of time it takes to collect from the customer) slowly rose from 69 days in 2009 to 74 days in 2011 telling me customer payment slowed a little during that time.

This situation improved somewhat in 2012 with operating cash flow at $15 million fiscal year to date versus a negative cash flow of $4 million during the same time in fiscal year 2011.

A great deal of risk lies with companies without proven self-sustaining cash generating capability.

Moreover, the notion of homemade soda needs to sink in with the masses before one can arrive at the conclusion of SodaStream’s status as a steady performer.

Low cost comes from use – It takes time for the incremental cost savings between making your own sodas to pay for the SodaStream system and buying finished soda products. The customer needs to use the product for a while before it becomes cost effective.

Opportunities

Strategic alliances – SodaStream boosts its revenue and market potential by partnering with companies like Kraft (NASDAQ: KRFT) who makes Country Time lemonade and Crystal Light syrup for SodaStream’s system. Relationships with iconic food companies like Kraft will help SodaStream’s adoption in the United States.

New markets – SodaStream’s penetration into new markets continues into 2012 with room to grow in Asia, Africa, Eastern Europe, the Middle East and the Americas.

Threats

Soda giants – The beverage giants sit on enough cash to either start a homemade soda maker system of their own or buy out SodaStream (Market cap:  $981 million) outright:

Company

*Cash/equivalents  most recent quarter

(In millions)

Coca-Cola

$14,935

Pepsi

$5,711

SodaStream

$52

*Source company latest quarterly filings

Already in certain areas, Coca-Cola places vending machines where you can customize your flavor of drinks. One of these days Coca-Cola, Pepsi, and Dr. Pepper may get tired of SodaStream and undercut them on prices, maybe even giving machines away in order to sell their own syrup, which they can easily do financially.

Conclusion

In brief, SodaStream, while healthy, fun and good for the environment provides conveniences only in certain situations. It also lacks a sufficient cash flow history to satisfy this stodgy old fundamental investor. Its overall business model remains unproven. When SodaStream demonstrates self-sufficiency I will revisit it at a future point. It does face opportunities through strategic alliances. Finally, SodaStream has a long way to go before it can rock n’ roll. A $52 million cash balance pales in comparison to Coca-Cola’s $14 billion cash stash. Will this company ever dominate? Coca-Cola will never let that happen.


stockdissector owns shares of Coca-Cola and Kraft mentioned. The Motley Fool recommends PepsiCo, SodaStream, and The Coca-Cola Company. 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!

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