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SODA: Investors Buy on the Partnership Deal with Kraft Foods
Posted by: Anh Hoang (IP Logged)
Date: January 5, 2012 09:34PM

I’ve been writing about the high valuation that the market gave to one stock dated back six months ago, when its price was ridiculously high and I was expecting an adjustment. And the adjustment happened a month later; the stock dropped from $75 to $35, and then gradually moved down to $28.5 per share at the end of November. From November, it has advanced very quickly, and it reached nearly $40 per share today. That is Sodastream International (SODA).

Today, the stock price advanced nearly 5%, mainly because of the good news for the business. Kraft (KFT) and SODA announced a strategic partnership for manufacturing, marketing, distribution and sale of Kraft Foods branded flavors for use with the SODA soda making system. This can be considered the first time that the carbonated beverage got flavors from Kraft Foods.

Doug Weekes, vice president of beverages for KFT commented on this partnership: “The carbonated market is an exciting segment for us. We’re delighted to be working with SodaStream to help bring these terrific brands to consumers who prefer their beverages carbonated. It’s a perfect marriage of our iconic brands and SodaStream’s breakthrough technology”. Along with that, Daniel Birnbaum, the CEO of SODA said: “We are excited to welcome these delicious Kraft drink mixes into our SodaStream portfolio. Adding our sparkle to these popular flavors should attract a new audience to both Kraft and SodaStream, and increase awareness of the soda making category.” Based on this event, Janney Capital thought that the partnership would create more consumer awareness for SODA carbonated drinks at home products, and keeps a buy rating with the target of $60.

In terms of the financial health, SODA seems to have quite a conservative financial structure. The D/A is around 35.7%, but only 4% is short-term debt. It has no long-term debt and more than 18% is accounts payable. On the asset side, nearly 32% of the total assets are in cash. With the market capitalization of $730 million, adjusting the cash and debt, the enterprise value of SODA stays around $684 million. Currently, SODA still consumes more cash than it generates to fund growth.

In terms of insider holdings, it is nice and neat to see the total directors and executive holdings as a group are as high as 43.2% of the total shares outstanding.

Even with the target price that Janney Capital laid out of $60 per share, the current valuation for SODA is already nearly 30 times TTM earnings and 3.8 times the book value at the $40 level. I believe it was kind of a high valuation even with the potential growth and partnership it has with KFT. Personally, I think I would be more interested if the price dropped to a much lower level to initiate a long position.

This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.

Stocks Discussed: SODA, KFT,
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