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SODA: What Does the Past Market Price Rise Indicate?

July 06, 2011 | About:
Sodastream International's (SODA) stock price had been increasing from $27 at the beginning of this year to $76 currently for just exactly six months, making a return for any early investor of 692% annualized.

Part of the reason contributing to the rise is the double profit that the company achieved for the first quarter of this year. Besides, the company just announced a new 850,000 square-foot manufacturing facility in Israel. The new primary site is expected to go live during 2013 at an approximate cost of US $42.9 million.

That is the irrationality of the stock market, swinging from over-pessimism to over-optimism. The current price of $76 a share, the total shares outstanding are 18.38 millions, makes the total market capitalization of SODA $1.4 billions, making valuation P/E TTM at 66.2, P/B at 8.1. Any value investors that heard of initial valuation would walk away.

From the time of 2008 to 2011, the net income of the company has made the record, increasing from around $1 million to $13.9 millions end of 2010. However, the increase in the net income in 2010 does not match up with the increase in operating cash flow. The operating cash flow is at -$11.7 millions in 2010, and its net income is at $11.7 millions, a gap of $23.4 millions. A reason for that gap is the increase in inventory and the increase in accounts receivables. The inventory can be understandable of expanding the business, but the increase in A/R normally gives us a concern.

The sudden increase in common stock (book value) from $23.8 millions to $154.7 millions, mainly from the increase in paid in capital in 2010. The company has little cash, little retained earnings (only $20 millions), and phenomenal growth in net income, but the cash flow is suffering. Combined with very high trailing P/E, high P/B makes the stock less attractive now for any value investors.

For the short term SODA might still keep rising, but I do not think the trend would continue so far. There is high probability that SODA needs to adjust to be back to its intrinsic value. But if the performance of the company in the future is good, sustainable incorporating with growth, the chance of fast rising intrinsic value might happen.

Disclosure: None

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About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

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Rating: 4.0/5 (42 votes)

Comments

Bill Smith
Bill Smith premium member - 3 years ago
Anh: thanks for posting this...I had no idea they went public.

My 2 cents for any interested readers, from the viewpoint of a brewer, who's also made plenty of soda:

The obvious competition for them are Coke/Pepsi, etc. I can tell you their competition also includes any beer/wine homebrewing store (online or brick & mortar), such as www.northernbrewer.com or www.morebeer.com Besides beer & wine making supplies, these stores directly sell competing soda making supplies.

Soda Stream is to soda as Mr. Beer is to beer--an introductory vehicle. I got started brewing with a Mr. Beer. But once I started shopping for cheaper ingredients, I learned about a whole other part of the economy called the homebrew store. Once a consumer visits one, they'll realize the total cost of ownership with Soda Stream won't make sense if the intent is to make soda for many years.

The soda extracts are slightly overpriced compared to others already on the market; however, where Soda Stream gets you is the CO2 recharges which are quite expensive compared to bulk recharges of 5#, 10#, or 20# CO2 cylinders which average $10-$20. A 5# tank can carbonate/dispense 2x-3x more product than the competing Soda Stream product at $30.

The divergence between their GAAP earnings (up) and actual cash flow (down) is disconcerting. Additionally, I don't think they have enough operating history to give an honest appraisal yet of fair value. Back of the napkin math seems to suggest 40%-50% growth with current prices.

I don't see how they can carve a moat offering a commodity. It seems to me any recent success they have has been fueled by the recession with people wanting to cut costs in their home budgets, and probably not a sustainable proposition once the novelty wears off.

But then again, we'll see what the future holds.
ken_hoang
Ken_hoang - 3 years ago
Thanks Brewerdude for giving more insights on the business of making soda. You mean the cost of making soda is now on the rise? For soda maker, what do you think the key success factor for them to succeed?

and if you know any, could you please give an example of any great long history business that have been making soda for many years? or they made soda before and change to making some other drinks as you indicated?

thanks again

Bill Smith
Bill Smith premium member - 3 years ago
I saw one of these up close and personal at the store today. It looks like a modern adaptation of the old-time drugstore soda fountains. The general cost of soda-making, which has been a hobby for a long time in the US, is relatively cheap...you just need water, extract syrup, and CO2. Then you need a method to store and serve--that is where their hook is. Their bottles are proprietary, expire after 2 years, and sell 2 for $20! Ouch! They have a wider mouth than standard soda bottles, and it screws into the unit to operate. The CO2 cartridges also appear proprietary. So it looks like they want to try and lock customers in this way.

As I was thinking about their business model, I realized they're more in the business of CO2 filling/exchange than selling soda stuff. Their annual report bears this out. It's littered with the use of "CO2". Check out some of these points to see what I'm talking about:

  • "Retaining business from refilling our exchangeable CO2 cylinders is important to the long-term success of our business and our future growth."
  • "..we will need to continue to develop the infrastructure for consumers to conveniently exchange empty CO2 cylinders for filled ones, whether through retail outlets or otherwise. The development and implementation of this infrastructure will require significant additional investment as our business grows and becomes increasingly complex in these markets."
  • "Our long-term revenue growth and profitability depend upon our ability to apply our business model of selling soda makers to new consumers and our consumables, particularly our CO2 refills and flavors, to consumers who already own our soda makers. Since we derive our highest profit margins from our consumables, the continued use of our systems by, and the repeat sales of our consumables to, consumers who have already purchased our home beverage carbonation systems is important to our business."
  • "In addition, we compete with suppliers of CO2 who seek to refill our exchangeable CO2 cylinders and other exchangeable CO2 cylinders compatible for use with our systems."
A key success factor? The answer is buried in this paragraph:

  • "We will face several challenges in achieving consumer acceptance and adoption of our home beverage carbonation systems in those markets, including consumers’ desire to carbonate beverages at home rather than purchasing carbonated beverages and consumers’ willingness to exchange empty CO2 cylinders for filled CO2 cylinders."
So it looks like they've built their business model around a commodity...CO2 filling/exchange. It wouldn't take much for another company to manufacture a replacement cartridge and fill it cheaper and erode their margins.
jimocconor1
Jimocconor1 - 3 years ago


what do you think the key success factor for them to succeed? Answer: have either of you actually tasted the product? A colleague of mine has had it for 6 months and I visited a couple of weeks ago for a 'taste test'. The stuff is way better than Coke/Diet Coke/Pepsi/Diet Pepsi. The ingredients are far less worse than that stuff too (ie. less sugar, fewer calories, no aspartame in the diet stuff). Taste's fantastic and unlike the 2 litre containers it doesn't go flat in a couple of days. Other success is that SODA has built in a value of each customer and assumes certain purchases of the syrups based on their experience in Europe with expectations in North America....however if you listen to latest corporate presentation early North American results are showing volumes of syrups are approx double that of Europe. The syrups have a very high margin (compared with the actual SODA machines). So don't be surprised if next earnings call they (again) increase their guidance for the balance of 2011 re: EPS.

could you please give an example of any great long history business that have been making soda for many years? Answer: ....umm, if you followed SODA you'd know that in Europe they have been in business for many many years (if you listen to last corporate presentation I think one in 5 people in Sweden is an active user of SODA).
set468
Set468 - 3 years ago
The gap in net income to operating cash flows is not as big of an issue as you make it out to be for SODA. It is more important to understand WHY they are reporting negative operating cash flows than it is to point out that it is negative.

First of all, small growing companies are usually cash poor as they attempt to grow in size.

Secondly, as you stated, the increase in inventory for SODA corresponds with their expansion into the North American market. This is fully expected for a company like SODA.

Thirdly, the increase in receivables also corresponds to growth in the company.

I recommend that you look at GMCR's financials since 2006. GMCR's business model is very similar to SODA's business model and the financials, including cash flows are very similar. GMCR's stock has had amazing results over the past several years.

SODA is also attempting to reach licensing agreements with large soft drink companies to sell their syrups. This is a similar approach that GMCR is using to sell Starbuck's brand coffee for their Keurig coffee makers.

Also, as a side note, I recommend stopping by a location that sells Soda Stream and ask them how sales have been. The recent retailer I asked said that the product has been selling extremely well. Furthermore, the product has had less return issues than GMCR's Keurig coffee maker.

ken_hoang
Ken_hoang - 2 years ago
Thanks Brewerdude, Jimocconor1 and set468,

Soda is quite refreshing to drink, and if it's cheap to make, and the brand image is all it matters. For the taste, remember the successful blind test that Coke has given to consumer in the 1980s and it comes to decision to release New Coke. But it goest against the psychology factor that it got shot down pretty badly.

GMCR is really a great stock if somebody owns it when it just hoover around $1 or $2 in 2007. Then it comes up with Keurig coffee.

@ Set468, could you describe the main competitive advantage relating to Keurig coffee that leads to GMCR success. Seems like coffee roasters has subjected to the rise. I personally involved with Coffee Holdings (JVA) and exited at $6, feel pain when it climbed up to $28 last month.

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