SodaStream - Shorts Get Squeezed As Fundamentals Keep Improving

Shares of SodaStream (NASDAQ:SODA) have seen a lot of upside in recent weeks. Shares of the developer and marketer of home beverage carbonation systems rose 13% in Tuesday's trading session, currently exchanging hands around $64 per share.

Since the release of its first quarter results a week ago, shares have advanced some 20% as fundamentals continue to improve, putting a squeeze on the shorts.

First Quarter Results

SodaStream generated first quarter revenues of $117.6 million, up 33.9% on the year before. Revenues came in ahead of consensus estimates of $115.5 million.

The company reported a 22.6% increase in EBITDA, coming in at $16.4 million. Net profits advanced by 19.5% to $12.1 million, wile adjusted net income rose to $14.5 million.

Consequently, earnings per diluted share rose by 18.8% to $0.57, while adjusted earnings per share came in at $0.68. Adjusted earnings beat consensus estimates of $0.65 per share.

CEO Daniel Birnbaum commented on the developments in the first quarter, "Our first quarter performance was highlighted by record consumable sales driven by strong gains in several of our largest markets. Growth was led by the U.S. where householder penetration and consumer usage continue to expand as evidenced by soda maker, gas refill and syrup unit growth of 78%, 101% and 119%, respectively."

A Look Into The Earnings Report

Revenue growth was driven by a solid performance in the Americas, while the performance in other geographic areas generally disappointed. Revenues in North America rose by 89% to $48.3 million, while revenues in Western Europe increased by 17% to $53.3 million.

Disappointing was a 6% revenue decline in Asia-Pacific, with revenues coming in at $9.3 million. Eastern European and African revenues came in unchanged at $6.7 million.

The company sold $43.0 million worth in soda maker starter kits, or 776,000 units for an average selling price of $55 a unit. Revenues from consumable increased by 37% to $72.0 million providing a strong set of recurring revenues. CO2 refills quantities were up 30%, while flavor quantities were up 34%.

All in all, gross margins fell by 50 basis points to 54.5% as the company become more reliant upon subcontractors in its manufacturing process.

Sales and marketing expenses increased by 200 basis points to 33.0% due to an increase in marketing and promotion expenses, especially surrounding the Super Bowl. Solid operating leverage resulted in a 110 basis point decrease in selling, general and administrative expenses which came in at 9.9% of total revenues.

All in all operating income came in at $13.6 million, or 11.6% of total revenues, down 150 basis points on the year before.


SodaStream ended its first quarter with $49.9 million in cash and equivalents. The company operates with $8.1 million in total debt, for a solid net cash position of around $42 million.

For the full year of 2012, SodaStream generated revenues of $436.3 million, up 51% on the year before. Net earnings came in at $43.9 million, up almost 60% compared to a year earlier.

Factoring in a 13% jump in Tuesday's trading session, the market values SodaStream around $1.31 billion, thereby valuing its operating assets at $1.27 billion. This values the operating assets of the firm at 3.0 times annual revenues and 29-30 times annual earnings.

SodaStream currently does not pay a dividend.

Some Historical Perspective

SodaStream went public as recent as November of 2010. The company which has been based in Israel sold its shares to the general public at $20 per share. Shares rapidly advanced to highs around $75 in 2011, followed by a steep pullback to levels around $30 later that year.

Shares traded in a relative tight trading range in 2012 but have moved up towards the end of the year. Year to date, shares have already advanced more than 40%, currently exchanging hands around $64 per share.

Between 2009 and 2012, SodaStream has more than tripled its annual revenues to $436.3 million over the past year. Net income more than quadrupled in the meantime to $43.9 million, as the shareholder base increased by almost 60%.

Investment Thesis

SodaStream's investor base has been heavily divided. Some see its machines being revolutionary and predict a bright future going forwards, while the bears think it is a hype.

For now it seems the company is still in an investment phase, and it is copying the well-known business model, followed by the likes of Gillette. SodaStream's machines are relatively cheap, but the refills, the equivalent of the knifes for Gillette, are expensive and only fit SodaStream's supplies. The soda syrups refills could result in higher margins and lower capital requirements going forwards, thereby generating tremendous amounts of cash flow.

The company continues to built its awareness, especially in the States which is the fastest growing region, making up roughly half of total revenues. SodaStream actually advertised during the Super Bowl over the past year. According to market research firm WPP, 30 seconds advertisements cost about $3.7 million in the recent edition. The company is partnering with Samsung (OTC:SSNLF) to built its technology into refrigerators and it signed a deal with Cott (NYSE:COT), to produce syrups within the US.

The company remains fully focused on the US going forwards. Revenue growth came from extra availability of its products at different locations, notably at Walmart (NYSE:WMT) as well as Target (NYSE:TGT). Despite a price tag of $129, the Source, the new model did really well in the first quarter as the company is in a transition phase to say goodbye to its older models. The company also tripled the number of locations were consumers can buy their gas re-fills to 12,000 over the past year.

Promising is that the company managed to boost its earnings, even as revenues fell by 11.5% compared to the previous quarter. In fact, SodaStream grew its quarterly earnings by some 61%.

Based on the solid quarter, SodaStream expects annual revenues to grow by 27%, coming in around $554 million, ahead of consensus estimates of $547.5 million. Full year net earnings are expected to increase by some 20% to an expected $53 million.

Bears point out the fact that the machines are a hype, and the drinks are too expensive for household consumption. Soft drinks have recently come under scrutiny given the poor health impact, thereby putting pressure on companies like Monster Beverage (NASDAQ:MNST) and even Coca-Cola (NYSE:KO). SodaStream could also be vulnerable to the extra scrutiny, but the company has a large assortment of healthier drinks as well. Bears are right in pointing out that current tax rates are not sustainable. Because of operating losses, the effective tax rate of SodaStream is still really low at the moment, but it will creep up towards statutory tax rates in the medium to long term.

Valued around 2.3 times 2013's expected revenues and 23-24 times expected earnings, the valuation multiples are not excessive given the rapid growth, especially in the US. As the machine base of SodaStream keeps expanding, demand for refills and syrups will boost margin expansion and revenue growth going forwards.

At these levels I remain on the sidelines, given the recent outperformance. Yet the company is no obvious short candidate either, given the strong fundamental performance at acceptable valuation multiples.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.