s very mSince my previous article about SodaStream (NASDAQ:SODA), the stock price has appreciated by a nice 12% and expectations are high around the fourth quarter earnings results on February 15th before the market open. With the stock price hitting new 52 week highs on a weekly basis, it is a good time to analyze what to expect from the upcoming earning report and identify the key metrics investors that should be looking at.
Let's start with the market expectations for the current quarter, according to YCharts. The market is expecting around 0.31 EPS on 125 MM in revenues.
That would be an improvement of 10.6% on revenue vs 4Q 2015, but below the 3Q 2106 revenue growth of 13% and just 1 MM more than in 3Q 2016. On the EPS side, earnings of 0.3 per share is a huge improvement of 230% from 4Q 2105 but a big decline of 56% from 3Q 2016 numbers. My impression is that the current estimates are well below what the company can deliver; hence, the stock price accumulation of the last few weeks, which might continue up until earnings day. I have come up with my own set of numbers of what I expect to be reported by SodaStream.
The Business Model and Seasonality:
SodaStream follows a razor/razorblades business model. It has the Soda Machines business and the Consumables, comprising CO2 canisters and flavors. The consumables business is more stable and it grows as the company grows the machine installed base. In the latest quarter this business line represented 62% of revenues and it commands higher gross margins than the machine business.
The soda machine business has an estimated gross margin of 35% and the consumable business has an estimated gross margin of 62%, so the sales mix is very important in calculating the gross margins that the company can achieve, which in the latest quarter was 51.8%. Normally, the 1Q and the 4Q are the weakest for the consumable business, since 84% of the business is done in Europe and Americas (principally US) and in winter people tend to drink less water, so they consume less of the company´s consumables. On the contrary, the holiday season is a strong selling period for the soda machines, especially in the US, and that helps get the 4Q revenue number over the 3Q revenue figure (that has been the case in the last 4 years), despite the fact that the consumable business is weaker. Therefore, gross margin in this quarter is expected to be below 3Q GM as the percentage of sales from soda machines increases.
There is an additional risk factor that might knock the GM to the downside and that is exchange rates. In the 4Q 2016 the euro depreciated almost 5% against the dollar (60% of SodaStream business in 3Q). On the other hand, the Israeli shekel has depreciated almost 3% in the period (lowering production costs).
Despite these short term factors, what investors should be focusing on this quarter is soda machine sales, since they will be driving revenues and profits in the years to come. They should also focus on whether the company gives any guidance for 2017. As SodaStream increases its installed base, it makes its wares more attractive to retailers and supermarkets with regard to carrying the consumables. For this quarter I expect machine sales to reach over 900,000 units vs 788,000 last quarter and 769,000 last year. With an average selling price of 58 dollars per machine, this gives us 53 MM in machine sales. In total, I expect revenue of 128 MM, gross margins of 51% and EPS of 0.66. These numbers take into account an increase of operating expenses and do not take into account any forex impact, which is very probable.
Looking into 2017, SodaStream has already turned the corner and has the infrastructure in place for future success after spending heavily in the last two years on its new manufacturing facilities, that made free cash flow almost nonexistent. According to the CEO, in the latest investor presentation at the 2017 ICR Conference (audio posted in the Company´s investor relations website: sodastream.investorroom.com), the company has the installed capacity to produce 7 MM machines a year. Now that SodaStream has also the financial means to invest in growing its business, I would expect/like to hear something regarding its future plans. In the ICR Conference they mentioned about a new machine that is in beta testing right now, the "MIX", that would be able to carbonate many other drinks and about the "ULTIMATE" that would make coffee, beer, etc.
Disclosure: I am/we are long SODA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.