SodaStream International: The Coming Rebound

When the shares of a previously high-flying company fall out of favor due to a perception of slowing growth, it can be sometimes prove to be a great investment opportunity. To determine whether or not this is the case with SodaStream International Ltd. (NASDAQ:SODA), let's take a look at the company's recent history and financial results.

Company Overview

SodaStream International Ltd. is an Israel-based company whose deep heritage dates back to 1903. The company engages in the manufacture, development, and distribution of home-based beverage carbonation systems which enable users to instantly transform tap water into a variety of soft drinks. It sells its products in more than 60,000 retail stores in 45 countries.

SODA operates under a variety of trademarks and brand names including SodaStream, Soda-Club, AlcoJet, Sprudelino, Aquabar, Gazoz, Aquafizz, Aquabubbler, Penguin, Sodamaker, and Fountain Jet. The company has 22 manufacturing locations and sells its products to an estimated 7 million households worldwide.

Recent History

During its recent earnings guidance in mid-January, company management released a statement along with a reduction in the company's full year earnings guidance from $65.0 million to $52.5 million. This downbeat guidance sent the shares of SODA into free-fall. According to management, this reduction in projected earnings is primarily a result of pricing discounts and increased operational/logistical costs. With the share price of SodaStream reaching near two-year lows, a big question now on the minds of many is whether the sharp drop in this once coveted company is justified.

Coca-Cola (NYSE:KO) and Green Mountain Coffee Roasters (NASDAQ:GMCR) have also recently entered into the at-home soft drink brewing industry with a recent partnership. This new partnership could prove to lead to increased competition for SodaStream.

Financials

Prior to this year SodaStream had shown tremendous net growth in multiple areas including net income and revenue/sales. Even this year, despite the drop in projected full-year profits, the company still expects year-over-year top-line growth over 29%.

Fiscal Year

2008

2009

2010

2011

2012

Diluted Shares Outstanding

19.04M

19.04M

14.68M

20.57M

20.97M

Net Income

775,512

9.92M

12.87M

29.47M

43.86M

Sales/Revenue

146.25M

146.03M

212.59M

309.76M

436.32M

Net Income Growth

-

1178.73%

29.81%

128.90%

48.85%

Sales Growth

-

-0.15%

45.58%

45.71%

40.86%

Adapted from Marketwatch.com

Click to enlarge

Competition

In an attempt to further strengthen its brand image, the company has also recently announced celebrity actor Scarlett Johansson as its first global brand ambassador. As a long-time user of SodaStream's line of products, Scarlett seems like a great match for the company's branding initiative. Scarlett's fan-following may also help the company to acquire new customers for the SodaStream line of products and further develop the SodaStream brand.

Another interesting thing to note is that SodaStream's banned super bowl ad became an instant viral hit on YouTube when it was uploaded last week, perhaps demonstrating the fan-power of Scarlett that is now at SodaStream's disposal. The now-modified commercial which aired during the fourth quarter of the Superbowl last Sunday, had originally been banned because it had called out its two primary competitors Pepsi (NYSE:PEP) and Coca-Cola by name.

Ticker

Market Cap

Trailing P/E

Forward P/E

Revenue

Current Ratio

ROA

ROE

P/B

SODA

$782.58M

16.38

15.99

$527.56M

2.24

7.80%

16.60%

2.42

KO

$167.58B

19.67

17.09

$47.27B

0.96

7.88%

26.67%

5.21

PEP

$123.03B

18.83

17.10

$66.25B

1.24

8.00%

30.46%

5.49

DPS

$9.81B

15.81

14.15

$6.02B

1.11

7.85%

27.58%

4.25

BUD

$156.21B

11.65

18.28

$41.77B

0.74

6.40%

32.58%

3.30

TAP

$9.64B

19.39

12.69

$4.21B

0.7

1.92%

6.01%

1.16

Average

$77.84B

16.95

15.88

$27.67B

1.17

6.64%

23.32%

3.64

Adapted from Ycharts.com (data as of market close 2/7/14)

Click to enlarge

From the chart above, we can easily deduce that SODA is one of the smaller players within the beverage/soft drinks industry. Despite this, the company still shows strong value as it has a trailing P/E ratio and a price/book value ratio below the industry average. SODA also has a ROA ratio near the top of its industry, but a below-average ROE.

Although the ROE for SODA is the second lowest in its peer-group, I believe that this ratio does not accurately tell the full story in this case. SODA's strategy currently revolves around selling its carbonation systems at near cost in order to rapidly expand the user base for its products. The company instead generates most of its money from sales of consumables such as flavors, CO2 canisters, and soda caps, similar to the business model currently executed by Green Mountain Coffee Roasters coffee business.

Price Target

After analyzing the pertinent financial information, I have come to the conclusion that a reasonable price target for the company would be somewhere in the range of $60-$70 based on a discounted cash flow analysis using conservative assumptions.

Assumptions:

  1. Share dilution will continue to play a minor role in the future.
  2. A discount rate of 15% is a reasonable discount rate for this company.
  3. SodaStream is able to continue to grow its net earnings at rate of at least 25%.

Conclusion

SODA appears to be an intriguing investment opportunity at the moment, with potential upside of more than 80%. Despite the potential upside, this opportunity may not be for everyone as there is likely to be a significant amount of uncertainty and risk associated with SodaStream during the upcoming and future fiscal quarters. This along with the entry of new competitor GMCR, makes the opportunity unfit for investors with weak stomachs.

Disclosure: I am long SODA. 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.