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SodaStream May Be a Buy

June 23, 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 their 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.”

Growth in Certain Regions

Sales in international markets, an area where SodaStream has increasingly focused on, showed favorable trends. Revenues from Western Europe rose 17% to $62.5 million for the quarter, while sales in the Asia-Pacific region were up 28% year-over-year. In the Central & Eastern Europe, Middle East and Africa region, sales rose 34% to $9 million. The double-digit growth rates are a sure sign of the success of the company’s aggressive expansion policies.

The company said that sales of consumables, which are basically syrup concentrates used to make carbonated beverages at home, rose 11%. The higher sales of consumables offset the 10% decline in revenues from sales of its soda machines.

Performance Recently

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.

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.

What to Expect

SodaStream also entered into a strategic agreement with Sunny Delight Beverages, a producer of Juice-based drinks, to co-develop SunnyD Tangy original orange, orange-strawberry, and other flavors exclusively for Soda Stream's home beverage carbonation system. The company expects that these popular flavors will attract new customers to both brands, eventually driving consumer interest in the growing home carbonation category.

SodaStream expects that its revenue would grow approximately 15% year over year. Excluding the effects of currency headwinds, EBITDA should grow 11%. Net Income is expected to increase approximately 3% year over year.

SodaStream is the leading player in the making-carbonated-beverages-at-home business, and global sales of its machines in 2013 totaled 4.4 million. It sells its machines at a small markup with the objective of making its real profits on sales of accessories such as refill cartridges and flavor bottles. This strategy has proven to be successful, and sales growth over the last five years has been more than 300%. The increase in sales in the last fiscal year was 29% because of strong demand for both machines and accessories.

To End

The company trades at a trailing P/E ratio of 20, which when compared to the projected earnings CAGR of 28.3% for the next five years, looks cheap. So, SodaStream could be a good investment prospect for the long run.

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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