Why This Soda Stock's a Wildcard

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

Israel-based SodaStream (NASDAQ: SODA) is emerging as a name to reckon in the soda industry, alongside industry titans such as Coca Cola (NYSE: KO) and PepsiCo (NYSE: PEP).

SodaStream primarily manufactures machines that allow consumers to make their own sodas at home. With growing concerns over health hazards like obesity, diabetes, heart problems, and more, sales of traditional sodas are falling rapidly. While the makers of juices, energy drinks, and other non-carbonated beverages are reaping the benefits, and Coca-Cola and PepsiCo are quickly increasing their non-carbonated beverage offerings, SodaStream can still capture an enormous opportunity.

The U.S., SodaStream’s biggest market, is also the largest soda market in the world. Soda makes up around 25% of the total US beverage market. Per capita soda consumption in the U.S. ranks among the highest in the world, and is almost double that for packaged water. As the Americans consciously try to shift away from traditional sodas, they are increasingly attracted towards the likes of SodaStream, which offers the same flavor and fizz at one-third the calories.

Where SodaStream scores

When SodaStream first arrived, most people didn't take it seriously. True, it had proved its worth in Europe. But the U.S., dominated by  giants Coca-Cola and Pepsi, was a different ballgame altogether.

Even today, SodaStream's 2013 revenue projection of $545 million is hardly a match for the twin kings of carbonated colas. In 2012, Coke booked $48 billion in revenue; Pepsi, bolstered by its sizable snack division, posted $65.5 billion.

However, there is no denying that U.S. soda sales are falling  steadily. According to market research firm SymphonyIRI Group, soda sales volumes declined 1.8% (excluding restaurants, vending machines, and some other venues) in 2012, with a sharp drop of 4.9% year over year in December.

SodaStream's homemade sodas contain far fewer calories, carbs, and sodium than traditional colas. Where one Coke and Pepsi serving contains 100 calories, SodaStream Cola contains only 35. Similarly for carbs and sugar, Coke and Pepsi contain 27 grams, while SodaStream's cola contains 9 grams. Finally, Coke has 35 grams of sodium, Pepsi 25 grams, and SodaStream Cola only 3 grams.

Furthermore, SodaStream has no dearth of flavors to choose from. Between traditional favorites like cola, lime, orange and root beer, and mixers like ginger ale and tonic, the company offers as many as 60 flavors. None contain high fructose corn syrup. Drinkers can also use fruits and natural juices to make their own personal favorites.

Americans drink around 165 litres of soda annually, among the highest per-capita consumptions in the world. That makes the U.S. an enormous playground for SodaStream.

SodaStream is going all out to strengthen its distribution channels and strike up alliances. While its products previously weren't readily available in the U.S., now CO2 canisters and flavorings can be easily found at retail outlets including Wal-Mart and Bed Bath & Beyond. The company has also entered an alliance with Samsung to incorporate its sparkling water technology in a high-end refrigerator. This one-of-a kind initiative opens up a whole lot of possibilities for future appliance integration.

The company basics

SodaStream has a market capitalization of around $1 billion, and booked $436.3 million in 2012 revenue. That same year, the company sold 3.5 million soda machines, including 1 million in the fourth quarter alone.

Its fourth-quarter results beat analyst expectations outright for both revenue and earnings. The company earned $0.45 per share (adjusted earnings) on revenue of $132.94 million. Analysts had expected $0.39 on revenue of $121.54 million.

SodaStream has provided full-year revenue guidance of around $545 million for 2013, 25% higher than its 2012 take. It expects to grow its net income by 18%. Its balance sheet remains solid, with working capital of $157 million and current ratio of 2.17.

Given its growth potential, the stock is still quite inexpensive compared to its like peers like Coca Cola and PepsiCo. It is currently trading at 15.54 times its forward earnings, compared to Coca Cola’s 16.83 and PepsiCo’s 16.18.

In short, SodaStream offers investors a good opportunity to be a part of its growth story.

Eshna De has no position in any stocks mentioned. The Motley Fool recommends Bed Bath & Beyond, 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!

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