SodaStream International Ltd.'s (SODA, Financial) downturn started in mid-2013, and its share price continued moving downward at a strong rate for nearly two and half years. The stock reached its all-time low in January 2016, down 83% from its five-year high. The stock, however, has been displaying strong signs of upward momentum after two years of brutal sales declines.
Shares of SodaStream were up more than 200% in 2016, and are up nearly 46% year to date. Moreover, it looks like the company’s impressive rally will not end anytime soon. The company reported robust first-quarter results in May as its revenue grew 14% year over year.
The at-home beverage machine maker was badly hurt by declining soda consumption in the recent past, but it is back in growth mode after pulling off a strategic branding shift that moved its carbonation machines, retailing partnerships and marketing campaigns to focus on sparkling water over soda.
According to a forecast report from ibisworld.com, per capita soft drink consumption will reach less than 30 gallons by 2020 due to the increase in health-conscious consumers.
It looks like the company is making the right move by shifting its focus to the sparkling water market, which is projected to grow at a compound annual growth rate (CAGR) of 3.5% between 2016 and 2020. The company is now experiencing high growth in the United States, Canada and Japan, which provide tremendous opportunities going forward.
In the most recent quarter, new machine sales surpassed the 2014 peaks. It sold more than 750,000 soda machines and 7.6 million carbon dioxide (CO2) refills, representing year-over-year surges of 34% and 12% respectively.
The growth in machine sales reflects the rising demand. Furthermore, the company should see additional growth in carbon dioxide refills as they continue to hit record numbers despite the multiyear weakness in machine sales.
On the other hand, SodaStream’s free cash flow continues to grow at a healthy rate. The company generated nearly $29 million in free cash flow last quarter, now holding a sizeable cash balance of $95 million. In addition, the company is debt-free.
The key challenge ahead is to build on the success of its surge in household penetration. It will likely face fierce competition in the years ahead as well established, large players such as PepsiCo (PEP, Financial) are also aggressively trying to maintain a strong foothold in the rapidly growing sparkling water market.
SodaStream projected its growth rates would slow down in the upcoming quarters as competition becomes more difficult. The company projects full-year revenue growth of 7% and operating income growth in the low 20% range.
Summing up
SodaStream has performed very well this year and continues moving forward with its new strategy. Most significantly, the company now has the financial resources to invest in its future. The first quarter is considered to be the weakest as the product tends to sell better in the hot summer months. Therefore, the strong upward momentum the company started the year with bodes well for the rest of 2017.
While investors might think the stock has surged more than 350% over the past 18 months, the outlook for future earnings remains bright considering high-margin carbon dioxide refill sales are poised to grow at a strong rate.
On the other hand, the stock currently trades with a price-earnings (P/E) ratio of 23.5, less than the industry’s average, suggesting it still has room to run. As an outcome, shareholders should continue to hold the stock for future gains.
Disclosure: No position in the stocks mentioned in this article.
