SodaStream, An Investment Not A Trade

SodaStream (NASDAQ:SODA) International crushed earnings the other day reporting .42 euro or $.56 cents. (That could change given the fact that the euro is worthless, although if it weren’t for the Euro the dollar would be too.) This beat the average analyst estimate of .25 euro. That is over a 50% positive surprise in earnings for SodaStream! Unfortunately for longs, Soda beat when the market finally decided to do something rational and fall on Euro Zone risk (see my article on the real risk with soda), so it only finished up about 6% for the day on Wednesday. Following a 6% up day it tanked, down over 10% at one point Thursday for no real reason. SodaStream seems to trade on everything from the "threat" of a failed competitor in Primo to Einhorn's comments on Green Mountain (NASDAQ:GMCR) having accounting issues which has nothing to do with SodaStream.

SodaStream's biggest problem is that it has no support from the big boys and is traded instead of bought as an investment. Once a few legitimate players step in with a few million dollars, SODA will stabilize and then rocket higher as the shorts get squeezed. Look for analysts to adjust Q4, 2011 and 2012 estimates upward, and another huge beat in Q4 to propel this stock higher. Unfortunately, most investors are cowards and don't want to be the first to buy. As a result, a lot of people buy after everyone else has bought and a stock is overvalued instead of at a discount. Act now and be the smart money getting in before everyone else does. Hold it for a few months (2-24), you won't be disappointed and will make money off of everyone that pours in after the the fact that SODA is undervalued becomes obvious to the oblivious. I stand by the call I made in an article on why SODA will rip in the next 4 months that, you guessed it, SodaStream will go sky high in the next few months.

I already highlighted why the bears are wrong in my previous articles and I was right. Q4 will be no different as SODA will beat thanks to distribution and earnings growth. Analysts were predicting about .25 euro for Q4 as well and Q4 is looking much better than Q3. This stock should easily have $2-$3 in EPS forward 12 months (remember earnings are in euro so adjust when looking at the multiple it trades at and comparing P/Es with other companies). A 25x multiple on realistic forward earnings puts this stock between $50 and $75 fair value.

I shouldn’t even have to say this, but for those of you who listen to Cramer, stop investing right now because you clearly have no clue as to what you are doing. You need to read and learn more. Cramer bashed SodaStream a few weeks ago, then reversed his position after having the CEO on his show, and now bashed it again based on consumables and CO2 in this video. Cramer was high on GMCR when it was trading around $100 and bashing SODA undervalued at $30. It seems as though he has his pair trade reversed. I will refute his claims in a moment. First and foremost I would like to say that Cramer is a very intelligent man and his show has been successful. I respect him as an entertainer. However, Cramer pretends to know the ins and outs of thousands of stocks, recommending and bashing things on a whim when callers call in to ask his opinion. Let’s take a step back and remember that a lot of guys just as smart as Cramer make hundreds of thousands a year following just 10 stocks in one sector as sell side research analysts at the banks. Pretending that you can adequately cover and have an intelligent opinion on 1,000+ is laughable to put it politely.

The biggest concern some people (Cramer included) have now is that the growth in sales of consumables and CO2 in the Americas has decelerated (CO2 refills went from +34% to +22% from Q2 to Q3 in terms of growth for SODA, driven by a lag in the Americas). This is not a concern for several reasons. First, it’s important to note that sales of both hit record highs. Second, most people are just discovering SODA’s products and have to buy the machine first (soda maker units increased 60% to 717,000). Note that the machines come with variety packs of syrup so you don’t have to buy product right away and it comes with CO2. No one needs to go out and by gas after just buying the product, so obviously soda maker sales will be higher and grow faster than CO2 at first. Third, CO2 and Consumable sales in Europe have been steadily growing. The company’s market in Europe is more established than in the United States, proving that the sales are sustainable and not a fad. More importantly, in Europe CO2 is sold in stores and easily accessible. SODA is just beginning to distribute and make CO2 accessible in the U.S. I had to order mine online via the website and it was a pain (ironic) because I wanted to buy it in the store when I was there checking out the consumables in person. Making gas easily attainable will help alleviate the nuisance of replacing canisters.

Soda crushed estimates and they will do so again in Q4. The stock finished around $36 or about 6% up despite the market crashing, so not too bad. It will continue to run up over the next few months as people wake up and realize this thing is legitimate and will sell. The biggest headwind this stock faces is gaining real long term investors over the short term. Not many asset managers and institutional players can buy and hold this stock as just buying a few million dollars of it would move the thing. There is not enough liquidity for the big boys to get in and out and as a result many won't touch it, just look at the bid/ask spread at any point during the day and how much it can jump in a few seconds. In addition, it is very volatile and risky which discourages big players. In the short term this stock is being traded and not invested in (which is why you have days where 50%+ of the float gets turned over). As people realize it is a solid company, investors will appear helping to stabilize the price, reduce volatility, force the shorts to cover, and send the stock much higher.

Disclosure: I am long SODA.