In the decades long fight, there remained only two real winners in the cola wars: Coca-Cola (KO) and Pepsi (PEP). Cola by any other name is a 2nd class citizen next to these two titans, Coke and Pepsi. Their dominance is seen and felt everywhere. As an example, Coke alone controls 70 percent of fountain sales in the United States. They have even been fully ingrained into every aspect of the American pop culture. Our society has accepted no other substitutes for generations. Their stronghold on the American consumer has been invincible with no other cola soft drink brand even having a remote chance.
AT LEAST UNTIL NOW
Enter SodaStream (SODA), a rising star who landed on Coca-Cola and Pepsi Beach and with the goal of storming their castle, and also happens to be the most undervalued soft drink stock. SodaStream makes home beverage carbonation systems that allows consumers to make their own fresh soda conveniently and cheaply in 150 different flavors that mimic all of the major brands with the added advantage of adjust the carbonation and flavor level. SodaStream competes directly with Coca-Cola and Pepsi, going right after their dominate market share with a delivery system device not currently offered by the twin giants, carving out a small but rapidly growing chunk out of their soft drink market. This is a direct threat against not only Coke, Pepsi, the Dr. Pepper Snapple (DPS) brands, and others but is even a threat to take some business away from Green Mountain Coffee (GMCR) and by extension Starbucks (SBUX), both of whom will be vying for consumer dollars this holiday season with their single serving make-yourself beverage machines. And let's face it -- you're not going to give as a gift both a SodaStream AND a Keurig Coffee maker at the same time. Competition from SodaStream will be more fierce than usual this year especially with their expanded distribution in Wal-Mart (WMT). And it doesn't end there -- SodaStream offers multiple energy drink flavors, two of which mimic Red Bull and sugar-free Red Bull in both look and taste only at a tiny fraction of the Red Bull price. As an energy drink addict myself, I have turned to the very low cost mock Red Bull option for my daily boost. Why give my money (not to mention inconvenience) to, for example, dominant energy drink player Monster Energy (MNST)? I believe as consumers figures this out, they will give Monster a run for their money quite literally which will cut into Monster's sales and profits. With Monster Energy potentially having their own image and legal problems on reports of deaths possibly linked to their energy drinks, SodaStream is well positioned to move in and take over some of Monster's turf.
While SodaStream continues to take away sales and profits from their competitors who seemed so unstoppable before it was as if they were entitled to their success like inherited royalty, SodaStream is also poised to steal investment dollars from its larger rivals' investor base. Now I will detail why I think SodaStream wins "The Pepsi Challenge" when it comes to soft drink investments. When valuing a stock, there are many factors to consider which I could literally write a book on. So I will focus on what I consider the five most important fundamental numbers to compare when valuing a stock versus its competitors -- past sales growth, estimated forward sales growth, past earnings growth, estimate future earnings growth, and Price-to-Earnings (P/E) ratio. I will compare SODA in each of these to its main public fizzy competitors PEP, KO, DPS, MNST, and National Beverage (FIZZ) based on analyst estimated figures. The higher the estimated growth rate the better and the lower the P/E ratio the better. A forward analyst P/E was used when available (based on 11/20/12 closing prices), otherwise a historical P/E was used when a (*) is indicated.
Clearly, SODA dominates in every category by a wide margins except on 2013 earnings growth percent MNST edges out SODA by a sliver but at only after a much slower expected growth in 2012, much slower sales growth, and a much higher price as judged by P/E ratio. Add to the fact that MNST possible FDA regulations, and the winner for most undervalued soft drink stock is clearly SODA based on the numbers.
THE WILD CARDS
Also important to note is that SodaStream is still in its infancy in product development unlike many of its mature competitors who have already saturated their markets. Apparently other companies in the drink space see SodaStream as both a top and bottom line threat and have taken a "if you can't beat them, join them" approach and have form partnerships with SodaStream. Recently Kraft (KRFT) and SodaStream launched flavors from Kraft's Crystal Light, Country Time, and Kool Aid brand lines. Even Campbell Soup (CPP) jumped on the bandwagon, seizing opportunity for its shareholders by jumping on board with their V-8 drink line. What other large household names wait in the wings ready to partner with and help expand further SodaStream's already rapid growth? The current and future earnings and growth are already a bargain -- adding still more opportunities could launch investor value into the stratosphere.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SODA over the next 72 hours.