Profit From SodaStream's Volatility

How volatile can one stock be? Investors in SodaStream International (NASDAQ:SODA) can probably answer that question for many of you. It is no secret by now that SODA is one of the most under-appreciated growth stocks in recent history. Multiples aren't what they used to be for growth stocks as the term "growth" has broadened and now includes "accelerating growth" and "slowing growth." In short, investors want to invest in those companies with accelerating growth as these companies are likely experiencing gains in market share and are probably expanding their business operations internationally as well.

When we think about the term growth stock we think about companies such as Monster Beverage Corp. (NASDAQ:MNST), Starbucks (NASDAQ:SBUX) and SodaStream International. Of the three companies mentioned here, only one has what would be identified as accelerating growth and that is SodaStream. The company initially offered 2012 guidance that showed the company expecting to achieve roughly 28% revenue growth YoY. Only two short quarters later, the company now expects to see nearly 40% growth YoY. Net income was initially offered to grow at 42% for 2012 and in just two short quarters the company now expects to grow net income by 55% for the year. The fact is this is nothing new for SODA investors as the company has routinely under promised and over delivered with respect to quarterly results.

Monster Beverage investors have enjoyed great returns over the course of the year as the stock has doubled recently. Monster's management successfully rolled out its products in several new markets over the course of the first half of the year, effectively building new pipelines and greater brand recognition for its line-up of beverages. The company has also spent a lot of hard earned revenues during this time on developing these new markets and it will continue to do so in order to achieve profitability in newer markets. Unfortunately for MNST investors, as new markets come into the mix, older markets have yet to achieve profitable levels and may likely prove to slow net profit and revenue growth in the near term. So for now, while we do recognize that Monster is still growing, we see that growth slowing in the near term unless the company can effectively address the issues in these less profitable markets. With a current multiple in the mid 30s, unless they can beat on the top and bottom line significantly, we could see a multiple contraction for shares of MNST coming. It appears that shorts are lining up to beat this stock down with recent Attorney General probes and on-going class action lawsuits, as noted in its SEC filings. In a recent article, it was outlined the well positioned partnership that could evolve between MNST and SODA .

Now let's talk about what we view as another growth company and that is Starbucks. The company continues to grow both top and bottom line results YoY although this year has been a little different for shareholders. Over the last 3 quarters, SBUX has decided to invest for the future by making acquisitions they feel will be accretive in the future. In November of 2011, Starbucks purchased Evolution Fresh for $30 million. This strategic acquisition was the first recognition by Starbucks of the rapidly growing "health and wellness" beverage category. Next, the company purchased Bay Bread for $100 million in cash and announced that it would impact full year profits by some 2 cents a share. Starbuck's CEO Howard Schultz said, "We are deeply committed to building a national brand with bakery items." Starbucks may also sell La Boulange products in grocery stores where it already sells coffee and tea, said the CEO.

While shares took a hit due to the full year profit outlook and the company missing earnings expectations recently, the company may regain its growth through additional store openings it has pledged earlier in the year. The company has slated to open over 1000 new stores this year with nearly 400 stores opening in China alone. Earlier in the year, the company also entered into a 50-50 partnership with Tata Global Beverages in order to enter the growing consumer market of India. Through its joint venture with Tata, Starbucks will open some 50 shops in India this year with the first slated to open during the month of August. Look to hear more about this venture during the company's quarterly conference call. Starbucks is clearly gearing up for the future and shareholders could be richly rewarded for their patience if Starbucks can execute its growth plan profitably.

Since we're talking about India, let's keep that ball in the air for a little while longer. One of the biggest problems companies have with entering into the Indian marketplace are the new rules and regulations the country has put into place with regards to foreigners doing business in the country. The new rules require the foreign companies to procure at least 30% of their products or inputs from small Indian companies if they own more than 51% in the venture. Now you see why many companies have to take on a partner to enter India. Tata Global Beverages is the second leading tea company in the world and is incorporated in India. Talk about having a strong partner; nice job Mr. Shultz. Capital Ladder Advisory Group sees the recent share price decline in SBUX as a buying opportunity as these additional expansion efforts and recent acquisitions should prove to be accretive for the company which has expanded well beyond expectations over the last decade. Steady growth ahead for Starbucks in our view so we can set this ball at rest ... maybe.

Why maybe? Well, Starbucks recently launched its very own line of energy drinks called "Refreshers," some of which are ready-to-drink and come in carbonated cans. That's right investors, Soda Stream could have another candidate for co-branding here via Starbucks. No pun intended with the word via although another one of the company's energy drink products is named "Via." In a recent interview, a Bloomberg news reporter asked SodaStream's CEO how and when the company would begin to do business in India. The CEO said the company would likely enter India through a joint venture in 2013. If we take a look at the synergies between SodaStream's business and the new initiatives taken by Starbucks in the energy drink category as well as health and wellness beverages, throw its expansion into India on top, and we would have to consider a co-branding partnership possibility.

SodaStream has remained a very volatile stock through the first half of 2012 even as management's execution of the business model has been flawless. It happens each quarter. The company beats expectations by wide margins and yet the stock sells off considerably. In Q1 of 2012, the company announced earnings that beat on both the top and bottom line while announcing a new distribution deal with Wal-Mart (NYSE:WMT) only to see the stock fall nearly 24% over the next two weeks before bottoming. On August 9, 2012 the company released quarterly results that once again beat analyst's expectations while raising full year guidance for a second consecutive quarter, and yet the stock fell from an intraday high on August 9th of $44.80 a share all the way to a recent low of $36.88 on August 28th. Fortunately, and if the past is an indication of future results, after the sell-off in Q1, the stock subsequently rose roughly 40% throughout the quarter on institutional buying, strong channel check results, an expanded co-branding deal with Kraft Foods (KFT) and a new co-branding deal with Breville LTD. On each of these announcements and news briefs, SODA effectively moved higher through the quarter.

SODA has seemingly found a new bottom around $37 and if this proves to be a new base for the stock, a 40% move higher from here on suspected announcements could prove to move the stock out of its eleven month trading channel with $48.50 representing the top-end of the channel and roughly $29.50 representing the low-end of the channel.

So what kind of announcements could we hear in the quarter from Soda Stream's management team? The first announcement could be another co-branding deal as we have outlined the possibilities with Monster Beverage, Starbucks, Dr. Pepper Snapple Group, Red Bull and others in previous research notes to clients. Another announcement could be that the company will enter new markets earlier than anticipated. Such countries could include India, Mexico and/or Greece. We could also see new analyst coverage, upgrades or reiterations during the quarter.

SodaStream rarely makes announcements outside of the realm of expansion efforts and co-branding deals, so at this time we will update investors on the latest with regards to the company's CO2 exchange program. In an article I submitted to Seeking Alpha ahead of Q2 earnings, I suggested that more retailers would participate in the CO2 exchange program going forward. I felt that Target Corp. (NYSE:TGT) wouldn't let this sales-driving program get away, especially with Wal-Mart adopting the program right away. Two weeks ago, Target began testing the CO2 exchange program in its pilot stores.

Soda Stream has hinted that it has been working with companies to develop a refrigerator that dispenses carbonated liquids. However, the company has yet to name these companies. At Capital Ladder Advisory Group we have uncovered two separate companies which SodaStream has partnered with to develop these refrigerator systems which will incorporate the Soda Inside initiative. These refrigerator systems will be key product launches and initiatives in the future as technology allows consumers to dose and serve carbonated beverages from home.

With Soda Stream participating at the IFA convention in Berlin from August 31st through September 5th, look for updates on what this event produces for Soda Stream on their website and for further details on everything related to Soda Stream feel free to visit here.

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.

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