SodaStream Is Fizzing Up With Potential - Part 2

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After the Green Mountain Coffee (NASDAQ:GMCR) and Coke (NYSE:KO) deal, I came out and said in an article (you may view it here) that SodaStream (NASDAQ:SODA) was still undervalued even if the new Green Mountain Keurig machine took over the market. I even argued that this could be seen as a positive for SodaStream, as competitors such as Pepsi (NYSE:PEP) could be intrigued into entering the market and partnering with SodaStream. Soon after my article was published, the stock went popping when analysts came out and repeated my thoughts.

While in my previous article I did present a bottom value for SodaStream, I never released a likely scenario for the market. While I based my previous $39 a share "safety net" (shares were then trading at $31 in after hours) on the idea the a Coke-Green Mountain venture would control the entire market, it seems very unlikely that such a monopoly would occur.

In the time since my last article, Pepsi has not announced interest nor a partnership with SodaStream. While Pepsi or another company such as Dr. Pepper Snapple (NYSE:DPS) would be ideal, for the purpose of this article I will assume that SodaStream will go alone for now.

According to the latest official SodaStream earning's report (Q3 2013), the company had $328M in shareholder equity, compared to a market cap of $850M. However, analysts are predicting revenue of $650M, with a rebound in net profit. From a fundamental perspective, SodaStream looks like a strong company, though with the impending competition things may change. If SodaStream continues to spend increased amounts on advertising, it can take away from potential value, but at the same time increase brand awareness and prepare for a marketing war.

For the purpose of my valuation, I will estimate approximately $175M in marketing, similar to levels in 2013. This year (2014) should continue as planned, since the new cold beverage Keurig machine is aiming for a 2015 launch.

With this information, and analyst opinions, this is what I expect SodaStream's income statement to look like for FY2014:

Revenue $650M
Cost of Revenue $300M
Gross Profit $350M
S&M $175M
G&A $60M
Pre-Tax Income $115M
Tax $14M
Net Income $101M

*Increases year/year are calculated based on revenue to expense ratio - revenue based on the average analyst estimate.

As seen in the table above, I believe that next year may be a break out year for SodaStream. While my estimates are above the average analyst estimate of $50M in net income next year, it is achievable. For the purpose of the article I will assume $50M in net income next year, though it would be very easy for SodaStream to beat those estimates.

This means, when SodaStream enters the competition with Keuring in 2015, it will have a shareholder equity above $390M (adding in Q4 2013), with (in my scenario) $90M in cash and equivalents.

Scenario: Assuming that Green Mountain Coffee and Coke are able to release the cold beverage Keurig machine at the beginning of 2015, there will be immense competition between Keurig and SodaStream. I will assume that the market for new machines will be $400M in 2015, and the machines will split the market.

The competition between the machines will not be on the hardware itself, but rather the softdrinks (flavors) and marketing. SodaStream already has multiple licensing agreements, and continues to add to its stockpile of flavors. It is impossible to know whether the introduction of Keurig (and its advertising) will increase the market base (though I will assume no for the article).I also assume that the companies will split revenue, and continue to sell carbonate and flavors to their old customers.

Using previous numbers for SodaStream, flavors and carbonate sales represent approximately 58% of revenue. This means that they should have approximately $375M in "repeat customer" revenue heading into 2015.

Possible Revenue Splits (only a sample of possibilities)

2015 "new" Revenue Split SodaStream Keurig
50-50 $200M $200M
40-60 $160M $240M
30-70 $120M $280M

For the time being, we will only look at SodaStream's numbers. We also have to add on the $375M in "repeat customers" purchasing flavors and carbonate. SodaStreams results could look like this:

50-50 40-60 30-70
Revenue (total) $575M $535M $495M
Net Income $90M $83M $76M

These estimated results do not include any of SodaStream's new ventures, including SodaStream Caps. Using the average of $83M in net income, I would value SodaStream at upwards of $1.2B, $58 a share (especially because of its shareholder equity of close to $400M).

While my estimates predict that SodaStream will spend more than $150M on advertising next year, and 50% of operating profit thereafter, these numbers can easily change. In this article, I assumed that SodaStream would battle Keurig head on by itself, while instead it might dial down or gain help from a partnership.

I believe that there is still time to get into SodaStream even though it has shot up since my last article. I think that SodaStream is more than 40% undervalued, even if it looses half of its market to Keurig. There isn't any cause to celebrate yet, but the drinks are getting ready.

Disclosure: I am long SODA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.