Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Investors in SodaStream (SODA) are seeing more pressure on their investment. In-line with many other consumer and retail companies which rely on a strong holiday season to deliver strong full year results, shares have seen a correction as analysts warn of cautious consumer spending. I disagree with analysts and think the current sell-off provides investors with a much more interesting entry-point at current levels.

Longbow Gets Cautious

Analysts at Longbow Research downgraded SodaStream from "Buy" to "Neutral" while removing the $68 price target. Analyst Philip Terpolilli believes that fourth quarter results will disappoint, trending towards the low end of his expectations, implying results will miss the expectations of "the street".

Promotions resulted in higher survey results for December at Wal-Mart (NYSE:WMT) and Bed Bath and Beyond (NASDAQ:BBBY). Yet light promotional activities at other retailers, including Costco (NASDAQ:COST), resulted in poor demand, according to Terpolilli.

Valuation

At the end of October, SodaStream released its third quarter results. The company ended the quarter with $39.2 million in cash and equivalents. Total debt stands at $20.0 million, for a modest net cash position.

Revenues for the first nine months of the year came in at $394.6 million, up 30.1%, compared to the similar period last year. Net earnings rose by merely 13.8% to $41.3 million in the meantime. Full year revenues are seen around $567 million, as net earnings are seen around $54 million.

Trading around $54 per share, the market values SodaStream at $1.13 billion, or its operating assets at $1.11 billion. This values operating assets of the firm at 2.0 times annual revenues and 20-21 times annual earnings. SodaStream does not pay a dividend at the moment.

Some Historical Perspective

SodaStream was sold to the general public in November of 2010 at a price of $20 per share. Shares rose to highs of $75 in July of 2011, but have seen a big pullback to levels around $30 in 2012. On the back of take-out rumors at the start of the summer, shares rose to highs of $75 in June, after which shares have sold off some 30%.

Between 2009 and 2013, SodaStream roughly quadrupled its annual revenues to $567 million. Earnings growth was even more spectacular, with earnings seen at $54 million this year.

Investment Thesis

Shares of SodaStream peaked in June on the back of rumors that notably PepsiCo (NYSE:PEP) and otherwise Coca-Cola (NYSE:KO) were making a possible bid for the company.

SodaStream could be interesting for those giants amidst slow growth in traditional sodas while SodaStream is reporting solid growth. A possible deal furthermore provides the large soft drink producers with an opportunity to provide soft drinks at home. On the back of the strong growth target, revenues are seen around $1 billion in 2016, a fraction of revenues being generated by the industry leaders.

On the back of the fading rumors about a possible deal and the third quarter earnings report, shares have seen a big correction. Reported revenues of $144.6 million missed consensus estimates by just a little bit, but it was the first revenue miss since the public offering, triggering a further correction in the stock. Growth was mainly driven by the European operations, partially offset by a fall in the Asia-Pacific operations.

Earnings were flat on higher sales and marketing expenses, as well as selling and general expenses and taxes, eliminating quite some appeal of the growth valuation. These soft results, combined with the poor "survey" as performed by Longbow Research are warning signs into the important holiday season. In recent years, SodaStream's products have quickly become "must-have" gifts for the holiday season.

Back in May of this year, I last took a look at SodaStream's prospects, as the shorts were getting squeezed. Volatility in the stock is elevated, as some investors believe its machines are revolutionary, while bears believe its products are hype.

For now, the company is in the investment phase on track to generate revenues of a billion in 2016. The company is following the business model of Gilette, selling its machines relatively cheaply but generating future cash flows from the relatively "expensive" refill supplies. The combination of higher margins and lower capital requirements going forward could generate huge cash flows in the future.

SodaStream continues to focus on improving its awareness, notably in the US. It spent millions earlier this year, which is a sizable chunk of earnings, to advertise during the Super Bowl, demonstrating its commitment for the long term.

I think shares are on the verge of becoming attractive again. Solid growth and the correction since the summer make shares reasonably attractive at current levels. Yet the long-term growth trajectory towards 2016, combined with improved margins, could result in a lot of room for operational improvements. On top of that is always the possibility of a take-out, especially when the two industry giants see the company as a real threat.

As such, investors might be looking for attractive entry points at these levels. If Longbow's research is correct, perhaps it is better to await the next quarterly report.

Source: SodaStream: Holiday 'Sale' Provides Investors With An Interesting Entry Opportunity