Profits of SodaStream Might Just Sink Shorts

SodaStream (NASDAQ:SODA) reported an impressive 50% gain in Q1 revenues to roughly €45.1M. More importantly, SODA reported a 141% increase in adjusted net income to €5.3 Million. Impressive growth numbers, but the debate rages over whether SODA is a fad or a future consumer powerhouse. See Cramer vs Greenberg challenge on CNBC to see the debate.

To back up a little, SODA is a leading manufacturer of home beverage carbonation systems. These systems provide an easier and greener way of consuming soda at home. According to the taste test, the SODA product even tastes better. Yes, greener because you can easily reuse your bottles as opposed to throwing away aluminum cans and plastic bottles with traditional products. No longer does a consumer have to drag cases of Coke (NYSE:KO) or Pepsi (NYSE:PEP) products home every weekend. Nor do you have to worry about having multiple 2 liter bottles that go flat as your family fails to drink them in time.

The debate will continue raging on whether this is a lasting concept or if it will just fade away in a few years. For now, though, the numbers back up a strong future, as SODA continues to handily beat estimates. For Q1, it reported earnings of €0.27 compared to estimates of €0.15.

Yahoo Finance and other websites are reporting estimates based on euros, likely leaving numerous investors calculating PE ratios based on the wrong numbers. In fact, the Yahoo Finance page for SODA shows a forward PE of nearly 42. When the euros are converted, the estimate drops closer to 28, below the five-year growth rate of 33%.

Also, the company continues to underestimate future numbers as it increased the yearly profit to €19M after originally forecasting €17M just three months prior in the Q4 report. This number seems absurdly low, considering it already reported a €21M run rate in Q1.

Competition might be an issue in the future, but for now it has first mover advantage. It maintains an 80% market share lead in Sweden, which is one of the most competitive markets for home carbonation systems.

Motley Fool did a nice report on the comparable stocks, showing how, on a trailing revenue basis, the stock is hardly expensive compared to the big boys in the sector. For example, KO trades at four times sales, so SODA at five isn't that expensive. Vomparative next big thing companies like Green Mountain Roasters (NASDAQ:GMCR) and Hansen Natural (HANS) trade at similar levels, with GMCR actually trading at a higher multiple of six.

So apparently, the stock of SODA isn't as sky high as the market thinks. On a revenue basis, it trades similar to the market and the forward PE is below the growth rate. Not exactly outrageous multiples.

The real key to whether SODA can become a home run stock is whether earnings continue to smash analyst estimates. The actual results for Q1 don't add up to the increased (but still relatively low) growth rates that SODA management guided to for 2011. Should the company continue growing faster than estimates this year, the stock will look a lot cheaper than the market thought. On a prospective basis, remember that SODA has a value of $1B and GMCR now sits above $11B. SODA's growth could just be starting to stream, and market size suggest a lot of room to grow.

Via the SODA PR:

  • Revenues increased 50% to €45.1 million
  • Americas revenues increased 153% to €10.2 million
  • Adjusted diluted earnings per share was €0.27 or $0.38
  • Soda maker unit sales increased 99% to 592,000
  • Consumable sales increased 34% to €22.6 million
  • America's soda maker unit sales increased 271%
  • America's consumable sales increased 216%

Based on first quarter results and current projections for the remainder of the year, the company is raising its outlook. The company now expects 2011 revenue to increase by approximately 30% as compared with 2010 revenue of €160.7 million, up from its previous expectation of 25%. The company now expects net income to increase by approximately 60% as compared with its net income of €9.7 million reported in 2010, up from its previous expectation of 40%. This guidance includes a share-based payment expense of approximately €3.7 million in 2011. On an adjusted basis, excluding the share-based payment expense, fiscal 2011 net income is expected to be approximately €19 million.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.