- Coca-Cola is a mature company, while SodaStream is a growth company.
- The current valuation of two companies implies that Coca Cola's growth will be comparable to SodaStream's.
- It is unfair that SodaStream gets valued like a mature company when it's still growing.
SodaStream (NASDAQ:SODA) is a small cap that has been on an aggressive growth mode, while Coca-Cola (NYSE:KO) is seeing a slowdown on its growth, where the company's growth rate is roughly in line with the global GDP growth, which signals that Coca-Cola is maturing. On the other hand, the market values the two companies pretty similarly. It's almost as if the market thinks either that Coca-Cola will accelerate its growth to match SodaStream's rate, or that SodaStream will reach maturity and stop growing very soon.
Currently, SodaStream trades for 21 times its forward earnings, which is slightly more expensive than Coca-Cola's 19. The first half of 2014 was not very profitable for SodaStream, because the company had to offer deep discounts to move some of its products, which hurt the margins. During the earnings conference, the company's management assured the investors that the company would return to solid profitability in the second half of the year, followed by a strong 2015.
If we look at normalized trailing P/E ratios, the gap between Coca-Cola and SodaStream's valuations widens; however, this only tells the part of the story.
For example, currently, Coca-Cola trades for 5.46 times its book value, while SodaStream trades for only 2.50 times its book value. Typically, mature and established companies don't get much of a premium over their book value, while growth companies do. Here we are seeing the opposite, where the market lets Coca-Cola get a sizeable premium over its book value, while SodaStream offers a margin of safety.
SodaStream currently trades for only 1.53 times its annual revenues, down from 3.25 last year. Coca-Cola's price to revenue ratio has been pretty stable, currently sitting at roughly 4. A lot of times, investors value growth companies based on revenues rather than net profits (for example Amazon), but we are not seeing this in SodaStream. The investors treat SodaStream as a mature and well-established company.
Since going public a couple years ago, SodaStream grew its annual revenues by 179%. This supports my point that SodaStream is still a growth company, even though the market doesn't value it as such. Coca-Cola's revenue growth is much smaller, in fact, pretty flattish in the last couple years. Yet, the market treats the two companies pretty much the same.
As for net income, SodaStream was able to grow this figure by 159% since going public. Since then, Coca-Cola's net income shrank by 28%. This alone shows that it is unfair to SodaStream to value it the same way as Coca-Cola is valued. SodaStream should get a premium over Coca-Cola's valuation, just like Amazon gets a huge premium over Wal-Mart's valuation (or imagine where Tesla would be if it was valued like Ford).
I am definitely not saying that Coca-Cola is a bad company or a bad investment. I am also not saying that SodaStream is a better investment than Coca-Cola. Whether a stock is a good investment or not depends on the goals of individuals. For example, a dividend investor will find significantly more value in Coca-Cola than SodaStream, whereas a growth investor will find much more value in SodaStream than Coca-Cola.
Here, the argument is based on nothing but fundamental valuation, and I argue that it makes little sense to value SodaStream similarly to Coca-Cola, because these companies are at completely different stages of life, and growth companies should get different valuations than established, mature companies.
The market is either being generous with Coca-Cola, or it is mistreating SodaStream. Some people might argue that Coca-Cola's strong history of dividend payments justifies a premium over SodaStream, but that's like saying Wal-Mart's history of dividends justifies a premium over Amazon, or Volkswagen's history of dividends deserves it a premium over Tesla. If dividends really justified premium pricing, companies like Exxon or Microsoft would not have low-teen P/Es.
Moving forward, even though we are seeing a slowdown in North American sales, things are looking very bright for the company elsewhere in the world, especially in Europe and Asia, where double-digit growth will continue. American culture is a little different than the rest of the world when it comes to people's attitude towards SodaStream. Many Americans drive big trucks and SUVs, and they can afford to go to a grocery store and buy huge packages of soda cans. Most people in Europe and Asia can't do that because they use public transportation to go around, which makes SodaStream a more attractive alternative for them. In the next two fiscal years, SodaStream is expected to pass $700 million in revenues and further approach its goal of $1 billion.
I am still holding my SodaStream shares, while selling covered calls along the way. I don't plan on selling anytime soon.