As a follow up on a previous article which examined the business model of SodaStream (NASDAQ:SODA), this article will discuss the allocation of capital to fund the growth of SodaStream's operations and the economic value created with those allocations.
Current management has been ramping up operations as is clearly seen when examining the growth of SodaStream's operating assets in the last three years (note that the intellectual property is backed out of operating assets so as to get cleaner image of he economic value added). As can be seen in the table below, net operating assets (NOA) have grown from $73.5M to $196.5M from 2010 to 2012.
In the same period revenues have grown from $208.5M in 2010 to $436.3M in 2012. Gross margin has been stable at 54% and operating income has grown from $14.5M to $45.5M over the period. In this analysis deferred tax assets and liabilities have been backed out and a tax rate of 16% is used to derive Net Operating Profit After Tax (management has stated that 16% should be its future tax rate).
Over the last three years NOPAT as a percentage of revenue has gone from 5.9% to 8.8% and return on NOA has improved from 16.6% in 2010 to 19.5% in 2012.
During the period management has reinvested profits as well as incremental capital into the business. As operating income has grown, the business has been able to fund investment to a larger extent with its own operating income.
With a 25% return on incremental capital invested in business in 2012, SodaStream´s management has been successfully adding economic value by allocating capital to projects that have earned returns far exceeding their cost of capital.
With its high return on invested capital, SodaStream is bound to command a high earnings multiple. By assigning a (backward looking) NOPAT multiple of 20 to its operations and adding the net cash position, we derive an equity value of roughly $800M, which corresponds to a value of $38.4 per share.
The operations of SodaStream and management's ability to allocate capital profitably make SodaStream interesting as an investment. Judging by its penetration rate in the US, the company should be able to reinvest earnings at a high rate of return for the foreseeable future. However, with current market prices at $58.79 per share, most of its potential seems to be priced into market value already.