2014 continues to be a losing year for shareholders of at-home beverage machine manufacturer SodaStream (NASDAQ: SODA), with the company's share price down more than 30%. SodaStream has been hurt by fading momentum in its Americas segment, its focus area for future growth, where competitors are looking to steal its thunder, notably Keurig Green Mountain (NASDAQ: GMCR) in a well-publicized partnership with beverage giant Coca-Cola (NYSE:KO). However, SodaStream's share price found some life last week, thanks to continued media speculation surrounding a potential buyout. So, is SodaStream a good bet at current prices?
What's the Value?
SodaStream is the top player in the at-home beverage space, selling more than 4 million machines in 2013. The company has taken advantage of its position as the dominant manufacturer in many of its markets, which has allowed it to generate consistent profitability, including a gross margin north of 50%. The profits have provided SodaStream with the ability to internally fund its expansion in new markets, leading to a sharp rise in its user base and total revenues over the past five years.
In its latest fiscal year, it was a continuation of the positive long-term growth trajectory for SodaStream, highlighted by a 29.0% increase in its top-line that was a function of double-digit growth in sales volumes of its machines and related products. During the period, the company benefited from a significant expansion of its distribution network in its major geographies, especially the U.S., which pushed its total active customer base to an estimated 8.5 million households. The net result for SodaStream was an increase in operating income, fueling continued investments in its manufacturing footprint.
On the downside, though, SodaStream was negatively impacted by a sizable decline in its gross margin during the period, due to higher product costs and what seems to be a strategic decision to engage in promotional pricing behavior in order to capture incremental market share. Combined with the greater costs of supporting a wider and larger distribution network, it added up to lower operating profitability and cash flow generation for the company.
Looking Into the Crystal Ball
Of course, the question for investors is what the shape of SodaStream's future profit growth trajectory will look like. Unfortunately, based on its latest fiscal results, the trajectory isn't looking too positive, evidenced by a steep double-digit decline in operating income for the company during its fiscal first quarter of 2014.
Anecdotally, one of SodaStream's main problems seems to be the rising costs of marketing its products against a growing band of challengers that are used to doing battle in the marketing ring. While Keurig Green Mountain doesn't seem to have a big presence in on traditional media, its partner on the development of a prospective at-home cold beverage machine is Coca-Cola, one of the perennial heavyweights in advertising spending. Given that Coca-Cola seems to have gone all in with Keurig Green Mountain, evidenced by its $1.2 billion equity investment in the company, it is likely to use all of the resources at its disposal in order to make the prospective machine a success.
Compounding matters for SodaStream, retail coffee giant Starbucks (NASDAQ: SBUX) has thrown its hat into the branded carbonated beverage ring, recently launching its Fizzio line of beverages in selected stores. The move is undoubtedly part of Starbucks' strategy to generate a greater percentage of its sales from non-coffee beverages and food, which has allowed it to continue posting comparable store sales and profit growth in FY 2014. While the company doesn't seem set on competing in the at-home cold beverage sector, it seems like only a matter of time, given that Starbucks already competes in the at-home space with its Verismo coffee and espresso machines.
The Bottom Line
At its discounted price, SodaStream seems like a good bet, given a top market share position in the at-home carbonated beverage sector, as well as its relatively attractive P/E multiple of roughly 16. That said, the company's poor sales performance in its Americas segment during its latest fiscal quarter could be a harbinger of things to come, which might include reduced overall profitability for the company. As such, investors probably should steer clear of the story until its profit margin shows some signs of stabilizing.
Disclosure: The author is long GMCR. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.