Expect a Pop When this Company Reports

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Soda Stream International (NASDAQ: SODA) is set to report earnings on Wednesday.  This small cap company has been growing hand over fist ever since entering the lucrative US beverage market.  For the quarter, analysts are expecting 50% growth in earnings and 36% growth in revenues from the previous year.  That translates to $0.72 cents a share, on revenues of $103.5 million.  Expectations are certainly high, even for a growth company.  But following this view doesn’t provide all the details to make an informed decision. 

Let’s prepare for SodaStream’s earnings report by understanding the most important drivers to their business.  Come earnings day, this will act as our guide. 

Absurd Potential
For those unfamiliar with this company, SodaStream sells at-home carbonated beverage systems, which is a fancy way of saying a do-it-yourself countertop soda machine.  Their success hinges on a razor and blade strategy.  As more soda dispensers are sold, more demand is created for their syrup flavorings and lucrative CO2 containers.  It’s is all about creating long-term customers.  And if this idea catches on in the US, which is the world’s largest carbonated beverage market, it’s a game-changing business. 

Educating consumers on the benefits of owning a SodaStream is crucial to increasing their market share.  The more consumers who understand that it costs as low as $0.15-0.25 cents per can of soda, the better chances they’ll sell more machines.  Still, SodaStream commands less than 1% of the total beverage market in the US.             

If SodaStream captured a much larger share of the US market, it would likely disrupt both Coca-Cola’s (NYSE: KO) and PepsiCo’s (NYSE: PEP) businesses.  At a certain level, I’d expect these giants to get more serious about at-home soda making.  However, there is probably a lot of growth between where SodaStream is today and when the big boys took action.  In other words, this is a great place for investors to be, provided SodaStream delivers on their potential.    

Five Positive Signs
Within the release I’ll be looking for these signs of progress:  

  1. More than $114.5 million in revenues.  While year over year growth expectations are high, sequential expectations are much lower.  Analysts are expecting a $500,000 increase in sales from last quarter, which represents a less than 1% increase.  However, over the last 12 quarters, the average rate of sequential revenue growth stood at 10.6%.  If the company is executing their growth strategy properly, I’m expecting to see higher sequential revenue growth than this average.          
  2. Less than 50% EU exposure.  Last quarter, Western Europe accounted for over 52% of total sales.  In terms of minimizing short-term business risk, the less EU exposure, the better.  This number should begin coming down because other markets have grown in importance.     
  3. Inventories less than $100 million.  Inventories have been ballooning because SodaStream has been shifting their operations to a self-distribution model.  This is great for overall gross profit margins, but is worrisome if they start carrying more than $100 million in inventory.
  4. 800-850K soda makers sold.  Between the machines, flavorings, and CO2, the machines are the most important number to watch.  They’re the lifeline to future sales, and a number over 800,000 would indicate continued strength.
  5. Improvement in kits-to-consumables ratio.  As of last quarter, the breakdown was 39% soda making kits to 61% consumables.  This indicates the majority of their revenue still comes from mature markets.  As the company shifts gears and focuses on less established markets, the ratio should improve in favor of more kits.  If it doesn’t, consider it a red flag.   

Three Red Flags
Be concerned if any of these issues develop:

  1. US sales slow.  The US market is extremely important for SodaStream’s future.  If sales haven’t doubled from the previous year, it would be taken as a sign of weakness.          
  2. Gross margins decline.  Over the past five years, gross profit margins have ranged between 53-55%.  Any negative divergence from this range would raise questions.   
  3. Retail network woes.  SodaStream relies heavily on their retail partners worldwide.  It’s where CO2 cylinders can be exchanged for replacement.  The closer in proximity one lives to an exchange center, the more likely they’ll remain a SodaStream user.  In the US, SodaStream relies on companies with huge retail footprints like Bed Bath and Beyond and Wal-Mart to handle these exchanges.  Should one of these giants decide to stop exchanging cylinders, it’d be a damaging blow to SodaStream’s business model.                    

Bottom Line
Come Wednesday, investors will know more about how business is faring at SodaStream.  If they hit on all the positives mentioned, they will surely knock it out of the park.  Be sure to keep an eye out for any potential red flags that may derail their efforts. 

As an investor, it’s always great idea to prepare yourself ahead of earnings announcements so you can set your expectations without emotional bias.  With that being said, I’m expecting SodaStream to show more encouraging signs of growth and optimism.

Dive In, Investors

SodaStream is blazing as a consumer-facing growth stock -- and it's just the kind of stock that legendary investor Peter Lynch used to single out before his peers caught on. Take a look at our analysts' premium report that will pique your interest.

TopDownTrends has no positions in the stocks mentioned above. The Motley Fool owns shares of Bed Bath & Beyond, PepsiCo, and SodaStream. Motley Fool newsletter services recommend Bed Bath & Beyond, The Coca-Cola Company, 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. If you have questions about this post or the Fool’s blog network, click here for information.

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