SodaStream International (NASDAQ:SODA) is a manufacturer of home beverage carbonation systems with a massive global distribution network. The company distributes its products in 23 countries through its direct supply channels as well as assisted by third-party distributors in the rest of the targeted regions. The packaged goods industry has grown considerably over the last few years and the companies have reported solid growth in revenues during the period. Similarly, SodaStream grew its revenues at a compound annual rate of 39.6% over the last three years. However, the recent first quarter earnings results have disappointed investors - the stock is down over 34% year-to-date.
SodaStream manufactures home beverage carbonation systems enabling consumers to easily transform ordinary tap water instantly into carbonated soft drinks and sparkling water. The demand for home beverage carbonation systems has elevated over the last few years, which resulted in 8.5 million system installations for SodaStream in the last year. Moreover, the company employs a "razor/razor blade" business model, which is designed to increase the sales of soda makers [the razors]; and to generate recurring sales of higher margin consumables, consisting of CO2 refills, flavors and carbonation bottles [the razor blades]. As the sales of soda makers increase, the subsequent sales of related consumables also increase. The business model can be easily understood in the image given below:
Source: SEC Filings
Performance & Growth
SodaStream has reported a massive increase in revenues over the last five years. This is mainly due to the increased sales volume of soda makers along with other related consumables.
Source: SEC Filings
According to the segments, the key regions of revenue growth are Western Europe, with an increase of $64.2 million, and the Americas, with an increase of $60.5 million in the last year. Moreover, the revenues from Asia-pacific and Central and Eastern Europe, Middle East and Africa [CEMEA] increased by $1.2 million and $0.6 million, respectively in the last year.
Source: SEC Filings
The massive increase in the company revenues over the last few years is also attributed to the company's impressive partnerships with other brands. During the last year, the company had an alliance with the famous kitchen appliances manufacturer; Whirlpool (NYSE:WHR), with which SodaStream introduced its patented carbonation technology into several products of Whirlpool's branded KitchenAid products. This will further benefit SodaStream revenue streams as it increases the product awareness in the kitchen appliances market. Such partnerships will prove to be very beneficial for the company in recording higher revenues as well as increasing product awareness in the kitchen appliances market. SodaStream also partnered with Samsung Electronics to manufacture a refrigerator system with SodaStream carbonization mechanism. This will also allow the company to increase its presence in the market. SodaStream has built an impressive lineup of partners including Kraft Foods (KRFT), Skinny Girl, Samsung, Whirlpool and Breville over the last few years, which should ensure revenue growth over the next few years.
First Quarter Earnings Highlights
In the last month, SodaStream announced its first quarter earnings, which stood ahead of analysts' expectations. However, a drastic decrease in margins affected the stock price. SodaStream reported increased revenues of $118.2 million, up approximately 1% year-over-year, with net income of $1.8 million, compared to $12.1 million for the last year. This shortfall is mainly due to the poor performance of the company's Americas region during the first quarter. Moreover, the company is in the process of establishing a new manufacturing facility in Israel, due to which third party contractors are hired for meeting the demand, resulting in increased operational costs. However, the company reported considerable increase in other regions of its distribution - Western Europe revenues increased 17% due to strong gains in German market, Asia Pacific revenues also went up by 28% year-over-year due to strong performance in Australia, CEMEA also reported 34% increase in its first quarter revenues. The inventory shortfall issue at the Americas region retailers also resulted in a weaker first quarter with soda maker units' sales decreasing 69% to 80,000 units and flavor units declining 20% to 2.7 million units during the period.
Future Growth Prospects
The growing awareness of the at-home beverage systems have now trickled down towards the huge kitchen appliances market players. The partnership of SodaStream with Samsung and Whirlpool is expected to give rise to a new trend of having sparkling water disposal and homemade fizzy drinks, respectively. Moreover, the demand for fizzy/sparkling water increased sharply by 40% in the Korean market since 2010 due to its stated healthy nutrition facts. Over the last few years, Korean market has turned a lot to the fizzy water trend as it is said to settle several gastric disorders and help with diabetic and high blood pressure patients. Similarly, cosmetic companies have also started using carbonated water in their products. The growing demand of sparkling water has also penetrated the bottled water industry in Korea - with an uptrend of 160% till since 2010. Since the hand crafted cold-beverage war is getting tougher with Starbucks's (NASDAQ:SBUX) latest carbonated system; Fizzio, the changing market dynamics of Korea can prove to be a great opportunity for SodaStream.
The revenue growth for the company remains strong in the key geographic regions. The first quarter results will prove to be a small bump in the road as the company gets its inventory and costs in order. We believe SodaStream will be a solid long-term investment and the recent fall in the stock price is a good entry point.
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