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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock-pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)

Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't — if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.

Drinking the Kool-Aid
(Nasdaq: SODA  ) shareholders' cups runneth over. Last week, as you may recall, the company's shares popped 11% on news that they would be partnering with Kraft Foods (NYSE: KFT  ) to market a line of "Crystal Light" and "Country Time."

At the time, my fellow Fool Rick Munarriz argued that this was, quote, "huge" news for SodaStream. That a "global giant" like Kraft would choose to ally itself with tiny SodaStream, rather than squash it like a bug with a solo entry into the homemade pop market, was surprising — because, as Rick pointed out, SodaStream lacked the patent protection that has forced other big-name consumer goods giants to partner with, for example, Green Mountain Coffee Roasters (Nasdaq: GMCR  ) .

Rick's not alone in this line of thinking, either. Yesterday, ace food products analyst Dougherty & Co. (a long-time fan of Green Mountain) announced that it was initiating coverage of SodaStream with a "buy" rating and a $45 price target. If correct, Dougherty's prediction suggests upside approaching 20% for SodaStream at today's prices. But is Dougherty right about this?

Drunk with power
Fresh from notching back-to-back market "beats" with its twin recommendations of fast-growing Green Mountain, Dougherty now tells investors to expect similar good things from SodaStream. As quoted on, Dougherty argues SodaStream is in the midst of "a major distribution expansion in the US, which will fuel strong revenue growth into 2012."

And I don't necessarily disagree. As far as "revenue growth" goes, SodaStream has enjoyed success, roughly doubling its annual sales over the past three years. Problem is, it's not revenue growth that worries me. It's profits.

I don't know about you, but personally, I invest in businesses in the hopes they will earn cash from their endeavors — not just sell increasing quantities of goods with no cash returns to show for it. That's key to why I'm not investing in SodaStream myself, despite the fact that it's an official Motley Fool Rule Breakers recommendation.

Technically "profitable," as GAAP accounting standards define such things, SodaStream has struggled to rack up real cash profits where they matter most: on the cash flow statement. After showing strong free cash flow growth in the 2007‒2009 period, SodaStream slipped into negative territory in 2010, and increased its rate of cash burn in 2011.

Soda & cheese: Two great tastes that taste great together?
This is not a trend I find encouraging. I'm similarly unenthused about the Kraft deal — and I'll tell you why. Rick, Dougherty, and other analysts seem to believe the Kraft deal is some kind of game-changer for SodaStream. But me, I'm not so sure. To me, this looks more like a low-risk gambit Kraft is making — a cheap bet that it might steal a bit of market share from in-store soda sellers Coca-Cola (NYSE: KO  ) and Pepsico (NYSE: PEP  ) by riding on the coattails of the fast-growing SodaStream.

Think about it. What is Kraft really risking by doing this deal with SodaStream? Best case, the idea takes off and Kraft gets to market a lot more drink mix to SodaStream fans. Coke and Pepsi find their soda supremacy disrupted, and Kraft becomes a major player in the carbonated beverages market. Worse case ... what? Kraft sells a few more packets of flavored aspartame before the fad dies out? That's about all the downside there is for Kraft in this deal.

Foolish takeaway
But here's the problem in a nutshell: While Kraft is risking very little in allying itself with SodaStream, investors who gamble on the stock's success are making a much riskier bet. They're betting that this company — which burned through $21.6 million in negative free cash flow over the past 12 months — will figure out a way to earn real cash profits to back up its $27.7 million in positive reported income.

Maybe it will, maybe it won't. The only thing I'm sure of is that SodaStream investors are spelling "risk" K-R-A-F-T.

Fool contributor Rich Smith does not own shares of, nor is he short, any company mentioned above. He does, however, have public recommendations available on 57 other companies. Check them out on Motley Fool CAPS page, where he goes by the handle "TMFDitty" -- and is currently ranked No. 340 out of more than 180,000 CAPS members.

The Motley Fool owns shares of PepsiCo and Coca-Cola. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters, SodaStream International, PepsiCo, and Coca-Cola. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended creating a diagonal call position in PepsiCo.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Read/Post Comments (5) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 11, 2012, at 5:39 PM, martinitony wrote:

    Rich, What exactly are you talking about regarding free cash flow? Are you referring to the cash that SODA invested in inventories, receivables and new equipment? You know about that concept that it takes money to make money?

    How would you want SODA to react to increased demand for its products, just say "no, we want to impress certain analysts with our free cash flow numbers?"

    You need to smell the profits. Profits eventually turn into that free cash flow as things settle down. I wouldn't concern myself with that metric at this point with a growth company.

  • Report this Comment On January 11, 2012, at 9:14 PM, Dianemar wrote:

    Have you tried this product? I think it will do well in countries such as Japan where the household has limited space. Given all the promotions they ran over th holiday period, I would assume it was costly.

  • Report this Comment On January 11, 2012, at 9:50 PM, Bcornwell1234 wrote:

    Great article, but I wonder if you are paid as a short promoter? Did you see the last earnings by SODA?

    Their market is more about the fizzy water group then soda flavors. If you know people who love tonic water then you'll get the point.

    They don't have any competition in the space. I think it's a hard concept for American's - that someone would want still vs bubbles. Still no clue?

    Next earnings will tell the story...

  • Report this Comment On January 12, 2012, at 9:44 AM, landoncz wrote:

    I guess you were wanting SODA to enter new markets with no advertising costs or overhead? martinitony is exactly right, at this stage in the game you should be looking at revenue and growth.

  • Report this Comment On January 13, 2012, at 12:32 PM, TMFDitty wrote:

    You all may be right. Rick may be right. But focusing on free cash flow as the key determiner of a stock's chances of success has me batting 0.730 on CAPS so ... if you don't mind, I'm going to stick with what I know works.

    Free cash flow, good. No free cash flow, bad.


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