Why There Might Be No Respite For SodaStream In The U.S.

Summary

With 30% of the overall revenue, the U.S. is an important market for SodaStream.

SodaStream, however, is seeing a steep drop in sales of its soda maker units in the U.S., and this is a big red flag.

Stiff competition from Keurig Green Mountain and Coca-Cola will make it difficult for SodaStream to make a comeback in the U.S.

SodaStream (NASDAQ:SODA) is not having a good time this year. The soda maker's shares have taken a massive beating in 2014, declining around 34%. The company's financial performance has not been up to the mark, as sales in the second quarter increased just 6.6%, while earnings dropped a massive 28%. Despite this weak performance, SodaStream shares jumped after the company released its second-quarter results.

The company beat analysts' estimates on both top and bottom lines, but investors seem to be ignoring the fact that its earnings are declining at an alarming rate. In addition, SodaStream is seeing weakness in the U.S. market, and it had to lower its sales expectations in the region.

Weak performance in the U.S.

There was soft demand in the U.S. for SodaStream's products, as several retailers are still packed with excess inventory from the soda maker. Since the company get almost 30% of its revenue from the U.S., any weakness here will substantially affect its performance. The sell-through of gas refill units, which is considered to be a measuring rod for consumer usage, according to NPD, increased 28% in the U.S. during the second quarter. According to SodaStream, this signifies the strength of its customer base in the U.S.

However, the sell-in and sell-through for SodaStream declined 55% and 31%, respectively, during the quarter. So, while SodaStream's existing user base might be buying more of its products, it is clear that the company is unable to land more customers.

However, SodaStream is trying to improve consumer demand in the U.S. by focusing on advertising. It is looking to improve its messaging platform, apart from using popular media platforms to attract more customers. Management is focused on getting sales in the U.S. back on track by expanding household penetration.

Why a comeback will be difficult

However, it is difficult for SodaStream to get its U.S. segment back on track. The company will face stiff competition from the combined might of Keurig Green Mountain (NASDAQ:GMCR) and Coca-Cola (NYSE:KO). Earlier this year, Coca-Cola bought a 10% stake in Green Mountain, which it eventually raised to 16%. With this deal, Coca-Cola is moving into the single-serve market with the help of Green Mountain. As reported by CNNMoney:

"The firms will collaborate over the next 10 years to produce Coca-Cola products in single-serving plastic pods, also known as K-Cups, for use with Green Mountain's forthcoming Keurig Cold at-home beverage system. As part of the deal, Coca-Cola is paying $1.25 billion for a 10% stake in Green Mountain, and will help market the new product.

The Keurig Cold system will likely be released in late 2014 or 2015. It will dispense cold beverages "including carbonated drinks, enhanced waters, juice drinks, sports drinks and teas," the companies said in a joint statement.

The Keurig Cold system will bring Green Mountain and Coca-Cola into direct competition with SodaStream, which already produces do-it-yourself soda makers and has seen strong growth in recent years. SodaStream shares fell more than 10% in after-hours trading Wednesday."

There is no denying the fact that Coca-Cola is one of the most well-known brands in the world, and its marketing budget is way greater than SodaStream. Earlier this year, Coca-Cola announced that it will "increase media spending and brand-building initiatives by up to $1 billion."

Hence, SodaStream's chances of making a comeback in the U.S. market will be hurt by Coca-Cola's march into the single-serve segment with Green Mountain.

Weak fundamentals

Moreover, SodaStream doesn't have a strong fundamental position. Its free cash flow and cash equivalents have declined, mainly due to investments in a new production facility, the acquisition of its Japanese distributor, and a rise in working capital. Over the last twelve months, SodaStream's levered free cash flow stands at a negative $38 million. Its operating cash flow has also been thin in the past year at just $27 million.

In addition, SodaStream has a weak cash position of just $36 million, which is lower than its debt of $38 million. So, even though SodaStream might look like a good investment on the drop considering its trailing and forward P/E ratios of 21.71 and 15.24, respectively, it would be prudent for investors to avoid the stock.

SodaStream has a checkered past. Its bottom line has dropped at a whopping CAGR of 33.5% over the last five years, and the trend hasn't reversed yet. Hence, even though the stock is down 34% this year, more downside can be expected due to increasing competition.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.