SodaStream: An Undervalued Growth Company

Summary

SODA has obtained a variety of different partnerships over the last year which seem to have set the stage for future growth.

Short-sellers consider the trend toward at-home beverage brewing to be a fad, but the numbers and customer loyalty figures say otherwise.

Strengths in the company can be seen in multiple areas including rapid revenue growth, reasonable debt and strong liquidity.

As I had previously written here roughly six weeks ago, SodaStream International (NASDAQ:SODA) continues to appear to be an undervalued growth company. In fact, since my original article, there have been several notable positive developments for the maker of home beverage carbonation systems. These developments are expected to be a great bonus for SodaStream and will likely help the company to continue its rapid growth.

Partnership with Whirlpool

Although SodaStream's alliance with Whirlpool (NYSE:WHR) had originally been announced during the latter half of 2013, the Sparking Beverage Maker product has only recently begun to hit the marketplace. With this alliance, Whirlpool has now incorporated SodaStream's patented carbonation technology into its brand of KitchenAid products. The strategy behind this partnership is truly remarkable. With this partnership, SodaStream will be able to increase awareness of the at-home beverage brewing market while simultaneously adding to its revenue streams. It also means that SodaStream will now be able to profit from the high end market segment as the KitchenAid machine is priced at a significantly higher price point compared to SodaStream's own brand name brewing systems.

Introduction of Sunny Delight Flavors:

With its alliance with Sunny Delight Beverages Company in early March, SodaStream has secured the right to become the exclusive provider of several new flavors under the Sunny Delight Brand. Two of these soon-to-be-released flavors include the Orange Strawberry and Tangy Original Orange beverage flavorings. These new flavors are expected to be introduced during the second half of 2014.

Exclusive partnerships like this deal with Sunny Delight could very well be the key to SodaStream's continued success and growth within the United States. These types of partnerships will allow for SodaStream's products to appeal to a variety of consumer tastes and preferences as most beverage consumers crave selection. For this reason, I believe that SodaStream is currently on the right track by focusing on increasing product and flavor selection instead of simply pushing several prominent flavors onto consumers.

SodaStream's Current List of Partners

To date, SodaStream has already built up an impressive list of partners including Welch's, Country Lite, Kraft Foods (KRFT), Skinny Girl, Del Monte, Campbell's (NYSE:CPB), Ocean Spray, Samsung, Sunny D, Whirlpool, Eboost and Breville. Based on these alliances, it is clear that SodaStream is already able to provide a collection of different home-brewed branded flavored beverages for consumers. However, SodaStream's partnerships with Samsung and Whirlpool in particular will allow the company to also have a presence in the hardware side of the marketplace as both Samsung and Whirlpool manufacture refrigerators and other kitchen appliances which could potentially incorporate SodaStream carbonation technology at some point in the future. This is the category that I believe could become a great source of future revenue growth for the Israeli company.

Competition:

Of all the competitors in the at-home beverage brewing space, the biggest buzz has been about the recent partnership of Coca-Cola (NYSE:KO) with Green Mountain Coffee Roasters (NASDAQ:GMCR). Although many believe that this partnership could spell potential disaster for SodaStream, I do not believe this to be the case. In fact, instead of diminishing SodaStream's potential I believe that this partnership serves only to validate the market for home brewing beverage systems. One factor that I believe many have overlooked is that SodaStream is still the market leader in the category and possesses a first mover advantage. While the Keurig Cold product line (GMCR's upcoming beverage brewing system) has not yet launched, SodaStream has continued to increase its collection of branded flavors and products through strategic partnerships.

Just as hedge fund manager Whitney Tilson's recent investment in SodaStream indicates, the growing trend in the market for at-home beverage carbonation systems is anything but a fad. In his investment thesis, Whitney has stated that "users (of SodaStream products) are very loyal and will continue using and buying the product." This customer loyalty combined with significant growth potential makes SodaStream a compelling opportunity. It's important to note that there is still plenty of growth left to be had within the space. To date, SodaStream's home brewing systems have penetrated only one percent of the U.S. market. This compares to Green Mountain's penetration of the U.S. household coffee brewing market of a little more than 10 percent. SodaStream still has substantial room to grow as the industry is still in its infancy.

Conclusion:

SodaStream continues to appear to be growing at a strong rate. The company has also taken some great measures to achieve market penetration with its many strategic partnerships. However, these efforts do not seem to have yet been recognized by the market, thus creating a great buying opportunity. Strengths of the company could be seen in multiple areas including the company's tremendous revenue/net income growth, strong current ratio and reasonable debt, great ROIC and ROE ratios, and substantial short float (could allow for a potential short squeeze opportunity). For this reason, I recommend shares of SodaStream as a compelling buy.

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.