SodaStream's Weakness Looks Like A Short-Term Phenomenon


SodaStream has struggled this year as its business in the U.S. hasn't performed well, but the company is using a tried and tested formula to get it back on track.

SodaStream has entered into partnerships with several companies to improve long-term performance and reach across the globe.

SodaStream's valuation and growth projections are impressive, making the stock a good bet on the drop.

SodaStream (NASDAQ:SODA) shares have fallen off a cliff in 2014. The company has lost a third of its market capitalization so far this year, and was recently trading close to its 52-week low. However, it looks like the company is in a turnaround mode after reporting its second-quarter numbers. SodaStream surprised investors as both its revenue and earnings were better than consensus estimates. SodaStream's revenue for the quarter stood at $141.2 million as compared to $132.4 million last year. It was better than Wall Street's expectations of $140.6 million.

SodaStream's growth during the second quarter was driven by record gas refills and an increase in the number of units sold. But, even after an impressive performance, management lowered its projections for the second half of the year, primarily due to weakness in the U.S. However, SodaStream's global diversification and innovation should help the company get better going forward. The company is already seeing good traction, as gas refills hit a record high of 6.5 million during the quarter, which is a 17% increase over last year. In addition, flavor and soda maker units sales increased 9% and 16%, respectively.

Repairing the U.S. business

SodaStream is gaining traction on the global platform, although its performance was partially offset by weak results in the U.S. One of the main reasons that caused this weakness was the ineffective method used for creating demand in the region. This was seen in the excess inventory retailers were carrying. As a result, the company lowered its projections for the year. According to CEO Daniel Birnbaum, "We are lowering our U.S. soda maker sales projections for the back half of the year while we reposition our brand behind health & wellness and refine our product line and marketing message to better promote this important consumer benefit."

Hence, the company is working to improve its standing in the U.S. market, and once it sets this area in order, it should see better times ahead. In fact, SodaStream's sales picked up in other parts of the world such as Western Europe, Asia Pacific, and Africa.

Some time back, SodaStream was facing a similar challenge as it is facing now in the U.S. in parts of Europe such as Germany. To resolve its problems, management responded quickly and took various strategic initiatives such as recruiting local leadership and engaging in in-depth consumer research. Management is looking forward to apply the lessons it learned from the European market to the U.S. market, and is hopeful of a better performance in the future.

Making impressive moves

In addition, SodaStream has entered into some strategic partnerships to strengthen its business. The company has partnered with Samsung (OTC:SSNLF), which is expanding the distribution of its carbonated refrigerators that are powered by SodaStream. Samsung has expanded to various new markets such as Germany, France, the U.K. etc., and this will fuel SodaStream's growth going forward. The company has also joined hands with Del Monte, which is its first flavor partner outside the U.S.

SodaStream is also shipping KitchenAid Soda Makers, which are powered by SodaStream, to retailers in the U.S. and Canada. Management is looking forward to expand this product in Western Europe and Australia. SodaStream has also inked a deal with Groupe SEB, which is a manufacturer of small domestic appliances and cookware. As a result of this agreement, SodaStream is now the official gas supplier for Groupe SEB's Tefal home soda maker that will be launched in the second half of this fiscal year.

Moreover, as consumers are avoiding traditional packaged soda due to high sugar content and the use of artificial sweeteners that are not very healthy, SodaStream expects its addressable market to improve. Consumers are switching to healthier, more natural means. To tap this shift in consumer preferences, the company introduced SodaStream Free in Europe, which is its new line of flavors that are lightly sweetened and contain 40 calories per eight-ounce serving. SodaStream has received a positive response from consumers for this new product, and the company is planning to launch this in the U.S. during the second half of the year.


Going forward, management anticipates its U.S. business to turnaround, even though the near term looks weak. But, a look at the company's smart moves and its good performance in the overseas markets indicate that the long-term prospects are still intact.

Also, SodaStream is cheap with a trailing P/E of 22.52 and a forward P/E of 15.81, which reflects earnings growth. With its bottom line expected to grow at a handsome annual rate of 25% for the next five years, SodaStream's current valuation looks enticing. Also, it has a PEG ratio of just 0.68, which is another indication of the stock being undervalued. So, with the stock having taken a massive beating this year, it might be a good time to invest in SodaStream as it can deliver value in the long run.

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