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The biggest risk facing SodaStream International (NASDAQ:SODA) is not whether or not its product is a fad, current tax rates might be low and going up, the fact that many manufacturing plants and production facilities are located in disputed territory on the Gaza Strip, or the expiration of the recent lock up and bank and/or management stock sales. The biggest risk concerning SODA is Europe, deflation, and a global recession or depression. SODA, like many other stocks out there right now, would be an absolute steal if it weren’t for Europe. Despite Europe, buying SODA could still prove to be a smart investment in the long run.

Over the past month I have visited Bed Bath & Beyond (NASDAQ:BBBY) and Macy’s (NYSE:M) stores in 3 different cities to speak with managers about past, present, and future sales and inventory outlook. I have read the entire annual report and the 2 most recent quarterly reports line by line, looked at sell side models, read research reports, and emailed investor relations asking everything from how exposed their workers are to being called up as reserves if Israel were to enter into a conflict, to their thoughts on marketing the product with liquor to college students on campuses such as Rutgers or UCONN during their Spring Day type of events. I can tell you with confidence, that SODA is legit.

SODA’s stock price has been hit hard over the past few weeks losing close to 50% of its value on conservative guidance comments from management. The comments were not even that bad and was arguably a result of management’s inexperience in dealing with the Street. SODA has sustained sales in CO2 and consumables in Europe and will do the same in the United States (the focus of its future growth story), thanks to management's aggressive marketing approach. This year in particular, SODA will be looking to add additional distribution a few months before Christmas. Even if this does not go through, everyone I talked to at the stores I visited confirmed that they sold out of Soda makers last Christmas, sales have been growing, and they expect to sell more this Christmas.

Modeling out SODA’s earnings using conservative estimates (4 refills a year at $10 for CO2 even though it costs $15, $5 consumables even though they run from $5 to $10+, $50 on soda makers 50%, 75%, and 30% gross margins respectively on those items, etc) SODA can easily hit $2 EPS from the U.S. alone with about 2% household penetration. The 2012 estimates of about $2 EPS are conservative and don’t add a premium for possibility for distribution roll outs at Wal-Mart (NYSE:WMT) or Target (NYSE:TGT) (that should be baked into the mutliple). $2 2012 EPS, with this kind of growth, you can put a 25x multiple on that easy and hit $50 fair value no problem with more room to go higher.

SODA’s product is great. I bought one myself. The product is healthy, environmentally friendly, and easy to use. If you are a soda water drinker, this provides huge savings for you. Even the syrups save money and taste great. One consumable (syrup) makes about 33 cans of soda. Three 12 packs in Stop & Shop can cost you $15, easy. A syrup costs $5. The smaller CO2 canister is good for about 5 syrups. $5 for a syrup times 5 syrups is $25, + $15 for CO2 is $40. 33 cans per syrup times 5 syrups equals 165 cans. Let’s say you pay $5 for a 12 pack (not to mention they take up a lot of space and you can have 4 different sodas via syrup in your cabinet instead of 48 cans stacked in your fridge taking up precious room),165 divided by 12 cans is 13.75 12 packs; we will be conservative and say 13. 13 times $5 is $65. You save about $25 making your own SODA for every 165 cans or so that you drink. The savings are better with soda water as you do not have to buy syrup. More importantly, the product tastes great, is healthy (no aspartame, buy diet too), and is fun/easy to use.

SODA does not need to be the next K-Cups to boost EPS enough to send the stock higher. The whole focus on it being K-Cups is somewhat silly to an extent anyway as they are not the same thing for various reasons. However, there are some similarities and SODA does have a tremendous potential for growth.

The biggest and most prevalent risk that SODA faces is that when (not if) Europe blows up, whether it be 1 day, 1 month, or 2 years, deflation, unemployment, and recessions will break out around the globe. The initial soda maker purchase is somewhat discretionary in nature and the savings argument is not strong enough to support its purchase standing on its own. Long term, I believe that SODA will be fine. Short term, I would be very careful. I like SODA below $40 and would consider buying it slowly on the way down after Europe worsens (the market is more likely to go down than up, a recession is not priced in to stocks).

I would wait for Europe to blow up and Greece to get booted or leave the EU or default on its debt (they can’t grow out of their debt tied to the Euro and the Germans won’t keep giving them handouts). Once the market loses another 10%-20%, I would start buying SODA on the way down. Eventually the U.S. government will most likely step in once the economy gets bad enough and execute QE3 to boost asset prices and you will make out in the long term (over a few years). This is a long term buy (2+ years). Despite a recession, I believe SODA, given the nature of its product, can still grow and weather the storm effectively long term.

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

Source: The Real Risk With SodaStream International