When one looks to buy a stock that they hope will increase in value, there are two important things that one usually checks. Growing revenues, and growing earnings per share. Growing revenues are important, but it also helps if you can translate that growth to the bottom line. Some companies can improve margins, while others are buying back stock to boost earnings per share numbers.
I think that SodaStream (NASDAQ:SODA) is a compelling investment opportunity for growth oriented investors. The company has a strong management team, key competitive advantages and key potential markets. The stock is up 55% YTD and several institutional investors have been buying the stock in recent quarters.
Why do I like SodaStream? I like it because the company generates its profit by selling syrup and gas canisters which is a lucrative business in addition to selling soda machines. SodaStream is an innovator and has room to grow. I am always looking for compelling growth opportunities and SodaStream is a good mix of Innovation and Growth.
In my personal blog, I separated 7 items to pay attention when analyzing growth stocks. SodaStream has many of those attributes.
Evaluating SodaStream EPS and Revenue growth
The first step is analyzing SodaStream earnings growth. I am looking for companies that are able to grow both quarterly and annual earnings more than 15% a year. That growth could come either from new product introductions or a solid strategy of expansion into new markets.
SODA increased last quarter EPS at 24% compared to the same quarter in the previous year. Some investors are bullish on the idea that the company will improve its quarterly EPS growth in the near future.
I always recommend to go for a minimum 15% quarterly EPS growth. SodaStream passes this first test. SODA earnings growth came from increased product adoption levels and production optimization which increased margins and growth levels.
Another factor to consider is that Wall Street research analysts just upgraded SODA EPS growth for the current year, increasing their EPS estimates by 5%.
SodaStream also shows a 3 year annual growth rate of 55%. It is essential to evaluate the company's EPS growth trend in the past year in order to get a clear perspective on how the company has been growing.
The company generated strong growth in the past 3 years, in fact higher than my 15% threshold growth level I use for these kind of companies.
Let´s go to analyze SodaStream revenue growth. It is important that both EPS and sales grow at similar levels. SodaStream reported 34% quarterly sales growth year over year. I require a minimum 15% revenue growth for these kind of companies and I am encouraged that SodaStream generated growth levels above that.
I find very encouraging to see that revenues grew more than earnings per share. This is a very important ratio because both sales and earnings must grow at the same levels. If a company shows a strong revenue growth that is even better than its EPS growth level, I consider that a very bullish signal. SodaStream generated quarterly EPS of 24% and grew sales 34%.
When investing in a company, an investor wants to see sales grow or improve over time, not just the last reported quarter. Looking at the financials in comparison to previous years will give participants a much better idea of how well a company is doing. SodaStream generated a 3 year average annual sales growth rate of 43%.
SodaStream generated good levels of annual sales growth in the past years. This is the result of a continued expansion into emerging economies and success in product innovation.
Management execution analysis
I think it is essential to analyze the company's ROE, which is a measure of profitability that calculates how many dollars of profit a company generates with each dollar of shareholders' equity. This simple ratio indicates to me how well a company's management is deploying the shareholders' capital.
SODA's Return on Equity is 17.60%.
SODA has a very good ROE. I consider ROEs above 15% as good performance indicators. This is a good measure that the company used reinvested earnings to generate additional earnings.
I think it is important that SodaStream has a low debt-equity ratio of 2.81. The firms that are burdened with a debt face a tough time when the economy turns sour, while debt-free companies, or those with little debt on their books, are not affected as much. The latter are in a position to tackle the situation and remain unfettered even during turbulent times.
Also, SodaStream has a ROA (return on assets) of 8.08%. This ratio tells how many dollars of earnings they derive from each dollar of assets they control.
It is important to check which hedge funds bought the stock in the last quarter and at what price they did so. I assume that if a prominent institutional investor put money into SodaStream, the stock will pass strict fundamental standards.
I feel encouraged that Janus Capital and Morgan Stanley bought the stock in the past months at an average price of $45. This shows that hedge funds have confidence in the stock.
The final step in any fundamental analysis of SodaStream is analyzing how cheap or expensive the stock is in relation to its industry and the SP&500. For many stock market investors, the Price Earnings Ratio or P/E is the single most important number when considering the valuation of a company.
The market prices SodaStream at 32x earnings in comparison to the industry average P/E of 22.8x and SP&500 trailing P/E of 16.8x.
SODA trades at a higher P/E than the SP&500 and this fact normally happens when the market expects solid results for SodaStream in the foreseeable future. I like how optimistic management was in the last earnings call explaining that while the macro is still weak, they expect results to improve in 2013.
SodaStream also trades at a higher P/E than its industry average.
It is also important to check the Price/Book Value multiple (P/BV) and the Price/Sales which are other very important multiples to analyze. SodaStream trades at 4.6x book and 2.9x sales. As I did with the P/E, an investor must compare this other multiples against the company's historical averages.
Comparison to peers
One key fundamental step in my checklist is evaluating SodaStream competitors and their most important multiples. This is important because the fact that a company has very few competitors gives me confidence to focus on the long term and do not be worried that the company could face big competition threats. Warren Buffett loves companies with strong moats and low competition, which is evident in his Coca-Cola (NYSE:KO), Wal-Mart (NYSE:WMT) and Procter & Gamble (NYSE:PG) investments. Let's evaluate SODA main competitors:
One of SodaStream's key competitors is Coca-Cola which trades at a market cap of $184.4Bbillion and a P/E of 21.67x and a P/S of 2.14x. The fact that Coca-Cola keeps expanding in both the US and emerging markets could be a potential threat to SODA core segments.
As we can see, SodaStream trades at a higher earnings multiple than Coca-Cola. This could be evidence that the market places higher expectations for SodaStream? in order to answer that it is essential to evaluate whether Coca-Cola key competitive advantages are stronger or weaker than SodaStream.
The second stock to analyze is PepsiCo (NYSE:PEP). This company is also expanding into emerging economies and trades at a P/E of 20.91x, P/S of 1.92x and a market cap of $126 Billion.
The market places lower expectations on PepsiCo's sales than SODA's, which is evidenced on PepsiCo lower P/S multiple. While a lower sales multiple is not a sure fact of reduced revenue expectations, sometimes it indicates that the market projects better revenues for SodaStream.
Dr Pepper Snapple (NYSE:DPS) is another competitor to take a look on. It trades at 15.6x earnings and 1.60x sales, compared to SODA's P/E of 32x and P/S of 2.9x.
Nestle (OTCPK:NSRGY) also competes in several areas. This stock trades at 18.93x P/Earnings and 1.80x P/S.
SodaStream is a company that reported strong EPS and sales growth in the past quarter. In addition I consider it positive that the company has a strong balance sheet (very low debt/equity ratio). It is important to invest in shareholder oriented management teams that execute very well. In the case of SODA this can be evidenced in its high ROE and ROA measures. I like the stock for the growth oriented investor.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SODA over 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.