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SodaStream Can Bubble Up to the Top of Your Portfolio

May 14, 2014 | About:

SodaStream International Ltd. (NASDAQ:SODA), the company behind the popular namesake beverage platform that turns tap water into sparkling soda, is surely a company to watch out for. In an effort to expand its presence as well as combat waning sales in the perceived "unhealthy drinks" arena, beverage companies via partnerships or their own research team, are bringing new products to market to entice consumers. SodaStream markets itself to consumers who consider themselves socially and environmentally responsible. It's mostly marketed to health-conscious consumers. According to Yonah Lloyd, SodaStream’s chief corporate development and communications officer, “Home soda making is still a new category in the U.S. with over 98% of homes as potential customers.”

Performance Report Card

SodaStream's revenue climbed 26% to $168.1 million in the fourth quarter, above estimates of $167.3 million. Net income was $700,000 versus $7.5 million a year earlier. EBDITDA decreased 31.4% to $8.7 million from $12.6 million in the fourth quarter of 2012. The decline in the profit was attributed primarily to a lower average selling price, largely through discounting and promotions, an unfavorable change in the foreign currency exchange rate, and a shift in sales channels.

But, on the other hand, SodaStream sold 4.4 million soda maker machines, an increase of 27% from 2012. Moreover, consumables sales grew 25% as a result of 30% growth in gas refill units and a 22% jump in flavored units. This drove full year revenue to $562 million, up 29% from last year.

SodaStream saw strong revenue growth in the Americas, where its revenue increased 16%, while in Western Europe, revenue increased 38%. In the Asia Pacific, SodaStream's revenue grew 28%, while 36% growth was seen in the CEMEA (Central and Eastern Europe, Middle East and Africa) region.

Sign of Relief

SodaStream may be down, as measured by its recent stock price performance, but it is certainly not out, as evidenced by a growing international customer base. The company has likely only scratched the surface of its potential in key growth markets like the U.S., where management estimates a potential market of 100 million households versus the roughly 1 million households that own a SodaStream machine today.

While SodaStream's near-term profitability has been hurt by the higher-than-expected costs of its growth initiatives, including its second year as a Super Bowl advertiser, the company's large installed base of users makes it a long-term winner in the beverage space.

Despite higher advertising spending, currently tipping the scales at a lofty 15.5% of sales, the company has used manufacturing efficiencies to generate an uptick in its adjusted operating profitability. The improved profit level is allowing SodaStream to further invest in research and development, including a machine platform targeting the restaurant industry.

Moreover, the company needs to cash in on its advantages over Coca-Cola (NYSE:KO) and PepsiCo (NASDAQ:PEP) products. Both of the beverage giants have faced increasing pressure about obesity and other health impacts from sugary soft drinks, while SodaStream's flexibility in letting owners change syrup levels or make spritzers from juice or other healthy drinks gives it a huge competitive advantage. Efforts like its GreenSanta campaign can highlight not only beneficial health impact but also the environmental advantages of SodaStream over products from Coca-Cola and PepsiCo.

What to Expect

The company announced that it has roughly 16,000 points of retail distribution of its products in the U.S. to meet the anticipated demand. Retailers have already begun to allocate additional shelf space for SodaStream products. In addition to the continued expansion of distribution channels both in the U.S. and internationally, SodaStream continues to build its moat through innovation. Examples range from built-in SodaStream systems in Samsung refrigerators, Whirlpool's upcoming debut of KitchenAid soda makers using SodaStream technology.

SodaStream has been investing in its TV commercials, adding additional production to its global facilities, and buying up its distributors in Italy and Canada to have more control of its operations. SodaStream's latest quarter finds it selling 27% more starter system kits than it did a year earlier, so the number of people exploring the simplicity and convenience of making soft drinks at home continues to grow. SodaStream has also updated its actual maker, including newer models that eliminate the guesswork of deciding the level of carbonation by manual operation. There are also SodaCaps, which are single-serve flavored capsules that eliminate the need for pouring syrup out of a bottle.

The Israeli maker of home soda machines can continue to grow at 30% in the rest of 2013 and 2014. With an expected growth rate of $1 billion, and revenue and net margins of 15% to 18% by 2016, it is reasonable to assume that there will be no looking back for this company. Shares of this company have plenty of room to double or triple over the next three years. SodaStream's long-term guidance denotes reaching $1 billion in revenues by 2016.

To End

SodaStream products are sold in over 64,000 retail stores in 47 countries including home and electrical appliance stores, hypermarkets, supermarkets, department stores and convenience stores. Companies like SodaStream have the potential to add to shareholders' wealth. Given the tremendous addressable market, soda companies can continue to march forward.

The company has successfully managed to beat analysts' estimates each and every quarter. SODA commenced its IPO in 2010; the stock has more than tripled in value from that time. Partnering with Kraft Foods (KRFT) is also a potential move taken by the company. This is a strategic step taken by SodaStream, as it should increase consumer awareness and credibility for both the brand and the home carbonation category.

Soda makers offer a highly differentiated and innovative solution for consumers of bottled and canned carbonated soft drinks and sparkling water. Going by my view, even this soda giant is facing some headwinds recently, it won’t let its investors down for long. The company may continue to rake in more profits, letting investors reap the benefits.

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