Pessimism On SodaStream's Prospects In The Americas Market Is Overblown

Summary

Pessimism on SodaStream's prospects is why the stock is undervalued.

SodaStream can grow its revenue and profits, even with new competition and decreasing soda consumption in the US market.

The CO2 refills business equals to the company's current market value, leaving other high margin businesses as free gifts for investors.

SodaStream (NASDAQ:SODA) develops, manufactures and sells carbonated water makers and exchangeable carbon dioxide (CO2) cylinders, as well as consumables consisting of CO2 refills, reusable carbonation bottles and flavors to add to the carbonated water.

Pessimism on SodaStream's prospects is why the market undervalues the company's stock.

SodaStream has a first mover advantage in at-home carbonated water/soda making business with CO2 exchange in more than 65,000 locations worldwide and growing. The technology to make carbonated water at home has existed for many decades, but SodaStream is the first to achieve commercial success by building global awareness in this category and a distribution system, with 21.5 million CO2 refills in 2013.

Total revenue in 2013 was $563 million and the Western Europe segment contributed $269 million, or 48%. Operating income before unallocated expenses was $82 million and the Western Europe contributed $55 million, or 67%. Unallocated expenses was $35 million, so total operating income was $47 million for 2013 ($82-$35).Click to enlarge(Source: company filing)

Compared to previous years, revenue growth has slowed significantly in 2014 due to poor results in the Americas segment. The investment community viewed this event negatively because SodaStream is still perceived to be in a high growth stage.

Click to enlarge(Source: company filing)

Main reason for revenue drop is the number of soda maker units sold, particularly in the Americas market. SodaStream did not break out the number in each region, but total soda maker units sold dropped 150K units, moving from 935K units in Q2 2013 to 785K units in Q2 2014, or 16%. SodaStream said most of the drop was due to weak performance in the Americas market.

Click to enlarge(Source: company filing)

As a result, the company's share price has dropped 33% this year, and the market believes that if SodaStream cannot win customers in the Americas market, then perhaps the company cannot win anywhere else.

However, even with setbacks in the Americas market, SodaStream has built a stronghold in the Western Europe where revenue grew to $78 million in Q2 2014, compared to $68 million in Q2 2013, an increase of 14%. Revenue in the Western Europe market is $140 million in 1H 2014, compared to $121 million in 1H 2013, an increase of 16%.

Click to enlarge(Source: company filing)

Pessimism about the company's prospects in the Americas market is overblown. This situation had happened in Sweden and other countries. In 2007, 730K soda maker units were sold globally, with 259K sold in Sweden, or 1/3 of total units. In 2009, the number of units sold dropped to 203K units in Sweden, but the number of CO2 refills continued to grow, increasing from 580K CO2 refills in 2007 to 1,445K CO2 refills in 2009.

Click to enlarge(Source: company filing)

A similar situation is happening globally for SodaStream. Based on the company's public filings, soda maker units sold in 2014 will decrease from 4.45 million units sold in 2013. An estimated 24 to 25 million CO2 refills will occur in 2014. Therefore, gas refills is expected to grow from 21.5 million in 2013 to 24 million CO2 refills in 2014, or 12%.

Looking from another angle, even with a slow or no growth scenario in the Americas market, business from the other regions should justify current share price as a buying point.

Click to enlarge(Source: company filing)

I believe the CO2 refills business equals to the current market value, leaving other high margin businesses as free gifts for investors. The company has built a significant user base and usage habits, making this a strong moat for the company to build on its first mover advantage and expand its platform.

SodaStream can grow its revenue and profits, despite an environment where soda consumption in the US market is decreasing.

Following charts show a decrease in soda consumption, in particular in the age group of 12-17 year olds in the US.

Click to enlarge(Source: Morgan Stanley)

Click to enlarge(Source: Morgan Stanley)

This has been a concern for the market because the US is the largest market for soda consumption at 170 liter per person per year.

Click to enlarge(Source: Slate)

Click to enlarge(Source: Slate)

However, Sweden's ranking in terms of soda consumption per person is quite low at 71 liters per person per year. Many countries have much higher consumption rates such as 170 in the US, 146 in Mexico, 101 in Canada, 98 in Germany, and 84 in the UK. This shows there might not be a strong correlation between consumption and usage of SodaStream's product.

Click to enlarge(Source: company filing)

Despite a much lower consumption rate, SodaStream has the highest household penetration in Sweden, suggesting SodaStream users are perhaps seeking something different than just lower cost of consumption. Therefore, pessimism on SodaStream's business prospects in the US market due to decreasing soda consumption per person is mostly likely false. The key is to find the right value proposition for US consumers.

A segment within SodaStream, the CO2 refill business, equals to the company's current market value, leaving other high margin businesses as free gifts for investors.

Based on public filings, the company has sold 17 million soda makers. Each machine is estimated to have 1.58 refill based on current usage trend, so total revenue from the CO2 refill business is expected to be around $274 million at $10 per refill. Op income is expected to be around $121 million for the CO2 refill business, which at 7x multiple to operating income equals to about $726 million. This business alone is equal to the current market cap.

Revenue 274,154
G&A 53,000
A&P 100,000
Op Income 121,154
Click to enlarge

Click to enlarge(Source: company filing, author's estimate)

Click to enlarge(Source: company filing, author's estimate)

Besides the CO2 refill business, SodaStream has two other segments, the soda maker business, and the flavor business. The flavor business is on track to sell about 35 million units, each at roughly $2-4 dollar at 50%+ margin. Current market value suggests investors can get this part of the business, which is worth $200-$300 million, for free.

Click to enlarge(Source: company filing)

Based on conservative estimates, buying at current share price is clearly a bargain.

Disclosure: The author is long SODA. 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.