Prior to the open on Wednesday, SodaStream International (SODA) reported earnings that again smashed analyst estimates. The stock plunged though the rest of the week as investors were apparently disappointed with guidance of 25% earnings growth on a 15 forward multiple. Ironically, the forward multiple now trades below that of soda market leaders The Coca-Cola Company (KO) and PepsiCo Inc. (PEP).
The company is a leading manufacturer of home beverage carbonation systems sold at major retailers around the world.
The stock has historically traded at sub-growth rate multiples for various reasons. The question is whether the stock will reach multiples compared to its historical and forecasted growth rates or remain at a cheap valuation that appears crazy.
Below are the highlights from the Q4 earnings report:
- Total revenue increased 55.2% to $132.9 million from $85.7 million in the fourth quarter 2011.
- Adjusted net income was $9.4 million compared to $6.7 million in the prior year.
- Adjusted diluted earnings per share were $0.45 compared to $0.32 in the prior year.
- Total revenue increased 51.0% to $436.3 million from $289.0 million in 2011.
- Adjusted net income was $50.0 million compared to $32.9 million in the prior year.
- Adjusted diluted earnings per share were $2.39 compared to $1.60 in the prior year.
The company reported Q4 adjusted earnings of $0.45 compared to analyst estimates of only $0.39. The company easily beat analyst estimates and would've reported a much higher number if not for additional one-time costs caused by Hurricane Sandy.
SodaStream had an amazing 31% growth in the established Western Europe market, showing that the fad label is completely wrong. The quarter was the first time to exceed 1M soda makers sold suggesting the consumable revenue could be strong in 2013.
Gross margins dropped during Q4 to 53% due to higher dependency on subcontractors and expedited shipments to support the Source launch and to fulfill better than expected overall demand
The company provided the following guidance for 2013:
- The Company expects full year 2013 revenue to increase approximately 25% over 2012 revenue of $436.3 million.
- The Company expects full year 2013 Adjusted EBITDA to increase approximately 34% over 2012 Adjusted EBITDA of $61.1 million.
- The Company expects full year 2013 net income on an Adjusted basis, which excludes share-based compensation expense, to increase approximately 25% over the Adjusted net income of $50.0 million reported in 2012.
- The Company expects full year 2013 net income to increase approximately 18% as compared with its net income of $43.9 million in 2012. 2013 guidance includes:
- An effective tax rate of approximately 10% compared with an effective tax rate of 1.7% in 2012.
- Share-based compensation expense of approximately $11.0 million compared to share-based compensation expense of $6.2 million in 2012. The increase is primarily related to the recent adoption of the Company's long-term incentive plan.
In order to really appreciate guidance investors need to understand the magnitude of the original company provided guidance for 2012 compared to the actual results. The below table highlights those numbers:
Based on the above information, the company has started 2013 with very similar growth expectations that ended up being nearly doubled last year. The starting 2013 estimate of $545M could easily end up at nearly $600M if this year is a repeat of 2012.
What Are Analysts Thinking?
Really analysts, it took another beat and solid guidance for the average analyst to forecast 2014 earnings above what the company forecast for 2013? A company growing by 50% and somehow the analysts didn't have at least 20% growth factored into the numbers already? In fact, the average estimate was for 2014 earnings to only increase 8% over the original estimate of $2.74 for 2013. Incredibly the numbers suggested only 20% growth in 2013 or a roughly 30% growth from the expected 2012 numbers to the 2014 original estimate of $2.96.
Table - Earnings Estimates
With the expectations for 2014 only creeping up to $3.08, this might be the largest underestimate in history. The conservative management team forecast earnings of roughly $2.99 for 2013 making one wonder why the analysts are so slow to increase numbers. Factoring in the likelihood that net income will grow at least 35% versus the 25% forecast and SodaStream could easily surpass earnings of $3.22 in 2013. Another 25% growth in 2014 would lead to earnings of $4 or nearly 30% higher than what the analysts list now.
Regardless of the strong results reported by SodaStream, the stock can't obtain a market leading valuation. The mega-cap stocks continue to be favored by investors; even though SodaStream's products provide a more convenient and economic replacement. Heck, the Super Bowl ad poking fun at Coca-Cola and Pepsi was blocked, providing the company with some free media attention.
The truly amazing facts are that those mega-caps have market caps over $100B and revenues greater than $50B yet the market values the stocks at double the growth rates. Both stocks have analyst expectations of earnings growth below 10% yet the stocks trade in the 15 to 16 forward multiples.
Even much maligned Green Mountain Coffee Roasters (GMCR) trades at a similar multiple to the company though it no longer has a similar growth rate. Green Mountain Coffee appears to be back on track after accounting issues, inventory questions, and increased competition, yet the stock trades at 14x forward estimates.
SodaStream might be one of the best values in the market. Not only is the stock cheap based on the estimates provided by Capital IQ via Yahoo! Finance, but those numbers appear to be incredibly low. On top of that, the stock trades at a PE below the mega cap stocks in the sector. Even worse, it has a similar multiple to Green Mountain Coffee that has gone through accounting issues and executive changes.
SodaStream has faced similar issues ever since the stock plummeted back in mid-2011 after what turned out to be a misunderstanding. Back then the company was the only known stock where estimates were reported in Euros leaving most investors under-valuing the stock. The very ironic part is that when the stock traded at $80 in 2011, the typical investor probably expected the growth rate just reported by the company for 2012. Imagine if the stock now traded at a 30x multiple to the real expectations for 2013. In that scenario, it would trade at all-time highs. Instead, the stock sold off following another strong earnings report and guide up.
Other investors can buy the expensive Coca-Cola or Pepsi or the much-maligned Green Mountain Coffee stocks that offer limited value, but a substantial opportunity exists to buy the fastest growing stock in the sector at the lowest valuation.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.