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I've been an avid fan of the Sodastream (SODA) concept and mission for about two years now, and have been thoroughly impressed with the company's progress these last couple of months. Here's a brief overview of what I'm expecting from Sodastream's Q4 and full-year report.

If you would like to read my exclusive interview with Sodastream CEO Daniel Birnbaum and the accompanying in depth analysis I published in mid September for more background information, feel free to check them out (Interview, Analysis).

The at-home beverage company has been red hot throughout the first three quarters of 2012, and will be reporting Q4 earnings on Wednesday, February 20. Analysts are currently estimating revenue of $121.03M and EPS of $0.38.

The Super Bowl Dilemma

Sodastream has seen a lot of controversy from Coke (KO), Pepsi (PEP) and NBC this quarter regarding its very public battle over a proposed Superbowl commercial. You can watch the ad here. In the end NBC had to air a modified version of the commercial, but Sodastream still managed to cause quite the stir.

The ad now has over 4.6M views on Youtube and climbing. Sodastream was given a significant amount of free press because of the drama. Although this saga didn't occur in Q4, it will have a big impact on the upcoming earnings release. Forward guidance can often be seen as more important than the actual earnings reported. Because so much has happened in Q1, I believe Sodastream is perfectly positioned to release guidance above expectations.

A Brief History

Sodastream has beat analyst estimates three out of the past four quarters, and has shown the capability to significantly surprise Wall St on both the top and bottom line.

Unlike most U.S. companies, Sodastream's biggest quarter earnings wise is Q3, not Q4. In Q3 2011 Sodastream reported EPS of $0.56 per share, and then $0.32 in Q4. In Q3 2012 it reported EPS of $0.80, representing year over year (YoY) growth of 43%. For Q4 analysts are only projecting YoY growth of 19%.

Despite low Q4 EPS, revenue in the December quarter is generally the highest of the year for Sodastream. Analysts are projecting $121.03M, which assumes YoY growth of 38%. Traditionally there is a small growth slowdown in Q4, but analysts seem to think it will be especially evident this year. Thus far in 2012 Sodastream has posted topline growth between 48%-51% in each quarter. This year projections are for growth to slow 23% in Q4 (due to seasonality of the quarter), vs slowing 18% last year.

After a quick comparison it appears analysts have set the bar low for the quarter.

Q4/Q1 Business Progress

Internet Buzz

Below is a list of a couple data points indicating just how well Sodastream's Super Bowl marketing plan went over with the internet.

  • From November 1 to January 15 (2.5 months) Sodastream grew its Facebook (FB) 'Likes' by about 5%. From January 15 to February 10th (<1 month) its 'Likes' grew by 7%+.
  • A Google Trends search shows peak search activity was 3x higher on both the day the ad was released on Youtube, and when the Super Bowl aired, than at its highest point in all of 2012 (when Sodastrem announced a collaboration with Breville). (click to enlarge)
  • Traffic to the website Sodastreamusa.com reached an Alexa ranking equivalent to its holiday season festivities when the ad was released.
  • Sodastream's now infamous Youtube Super Bowl commercial received almost 5,000,000 hits within just two weeks of its release.

News/Happenings

  • November 7th - Sodastream products are now in 60K retail stores globally, and 9K in the US. U.S. store count grows 12.5% from Q2-Q3.
  • November 12th - Sodastream anounces a deal with Campbell's soup (CPB) to offer all of its V8 line on Sodastream machines.
  • November 27th - Reports indicate that Sodastream has already sold out in Wal-Mart (WMT), its newly announced partnership.
  • December 5th - NY Post blogs that Sodastream is selling more than 10,000 units per day, and noted that Pepsi is strongly considering entering the space. This is big news because although Pepsi will bring new comptetition, their move is a nod of viability towards Sodastream's business model. This would be the first official answer to Sodastream from one of the two beverage titans (Coke or Pepsi).
  • December 14th - StreetAuthority picks Sodastream as an early holiday season winner.
  • December 20th - Oppenheimer issues a note saying Sodastream's margins will pickup even more in the coming quarters because of temporary costs such as outsourcing manufacturing getting phased out.
  • December 20th - Barron's publishes a piece about Sodastream and says more than 9,000 U.S. retail stores now participate in its canister exchange program, triple from the year prior.
  • January 4th - Stifel Nicolaus reports that it's channel checks indicate low inventory (most likely due to high demand) at most outlets and stores.
  • January 7th - Barclays initiates Sodastream with a 'Buy' rating and a $55 price target.
  • January 11th - Citigroup initiates coverage on Sodastream with a 'Buy' rating and a $60 price target.
  • January 17th - Sodastream presents at the ICR XChange Conference, highlights include growth plans in India, Mexico and Brazil. The presentation also emphasized the potential of Sodastream's new Aquabar.
  • February 6th - Monness Crespi increases its price target on Sodastream shares to $70 based on positive channel checks.

Guidance

Officially Sodastream has yet to issue any 2013 revenue or EPS guidance. But of course analysts have already calculated their projections. Wall Street is currently expecting 2013 revenue of $508M and EPS of $2.74. That implies revenue growth of 19.7%, EPS growth of 28.6%, relative to 2012.

When looked at from both a historical and fundamental this seems like a drastic under estimate. As I mentioned earlier in the article Sodastream has posted year-over-year growth higher than 30% for the past 11 quarters. In fact for the past three quarters growth hasn't been below 48% once.

For Q1 analysts are projecting $111.3M in revenue, representing year-over-year growth of 26%. Not only would this be the first sequential revenue drop in 5+ quarters, but it comes at a time when Sodastream has had more press than any other!

Apparently analysts aren't pricing in any of this Super Bowl saga, which has brought Sodastream so much positive attention. Estimates for the March quarter have barely changed in the past 90 days, and thus are a weak reflection of the rapidly evolving Sodastream story. Multiple online metrics (see above) indicate Sodastream received a huge promotional boost from its 'failed' Super Bowl campaign, which could translate into higher sales early in Q1. For this reason I believe we will see Sodastream project guidance above current analyst estimates.

Valuation

With estimates at $2.74 for 2013 EPS and Sodastream trading at $50 per share we are looking at a forward P/E of 18.2x. That is directly in line with Coke's 17.2, and Pepsi's 16.4. The only difference is that Sodastream grew revenue at ~45% in 2012, while Coke's grew at 3% and Pepsi's actually fell 1%.

Sodastream is a hard stock to value and compare with peers simply because it doesn't have many. Coke and Pepsi have very different business models despite competing directly with each other in the soda market.

Overall Sodastream shares appear extremely attractive even with current estimates. Buying Sodastream for the same multiple that Coke and Pepsi trade at seems like an incredible deal considering each company's respective growth prospects. Both Coke and Pepsi have almost no room to grow going forward, while Sodastream still has less than a 1% share of the U.S. soda market.

Conclusion

Who knows if Coke's weak earnings had anything to do with Sodastream's products, but no matter how you slice it at home beverage devices are gaining traction. Cuisinart and Sodastream are the only players in the at-home soda business now, but that could change soon.

A major risk to both Sodastream and Coke/Pepsi will be the potential commiditization of at-home soda makers. Much like we saw with Green Mountain (GMCR) and the rapid commiditization of at home coffee makers, this poses a significant threat. That being said Sodastream's products are harder to replicate because of the technical knowledge needed to inject carbonation into each beverage (or so they say).

For now, Sodastream is miles ahead of its competition in terms of brand, sophistication (of its products) and eco-friendly image. If at-home soda makers prove to be the disruptive force Coke and Pepsi so deeply fear, then Sodastream will benefit greatly.

With low earnings expectations that don't seem to have properly accounted for new Super Bowl hype, Sodastream has room for an upside surprise. That near-term catalyst combined with a low P/E compared with historical top-line growth, makes Sodastream very attractive at $50 per share.

Source: SodaStream Q4 Earnings Preview: All Indicators Point To A Big Upside Surprise