Rising Star Buy: SodaStream

This article is part of our Rising Stars Portfolio series.

Almost a year ago, I decided SodaStream (Nasdaq: SODA  ) shares were too pricy for my taste. Since then, the stock price has been slashed by more than half, so now I'm ready to buy some shares for the real-money, socially responsible portfolio I'm managing for Fool.com.

The business
SodaStream, which is headquartered in Israel, is trying to take some of the fizz out of traditional soft-drink companies such as Coca-Cola (NYSE: KO  ) , PepsiCo (NYSE: PEP  ) , and Dr Pepper Snapple (NYSE: DPS  ) .

The SodaStream machines allow consumers to easily make their own fresh soda or sparkling water at home. The user-friendly machines fit easily on countertops and use a small carbon-dioxide tank and reusable bottles designed for the system.

Let's forgive SodaStream for the names it's slapped on some of its soda syrups, like "Dr. Pete" and "Fountain Mist," which appear to be its answers to the taste sensations of Dr Pepper and Mountain Dew. The company's given consumers a cheaper and more convenient alternative to the burdensome 12-packs, cases, and bottles they've traditionally schlepped home from grocery stores.

SodaStream wouldn't be a contender for this portfolio if it didn't have an environmentally friendly or socially responsible angle, so here it is: Making soda and sparkling water at home reduces the amount of waste from cans and bottles. As of the ticking counter on the SodaStream website, the company has "saved the world" from 1.76 billion bottles clogging up waste streams. Meanwhile, manufacturing throwaway plastic bottles uses a lot of energy and oil on top of the troubling elements of bottles that end up in landfills and highly ecologically inappropriate places, like the Great Pacific Garbage Patch.

Did I mention SodaStream provides a cheaper alternative to traditional soda from the soft-drink heavyweights? That means the systems will appeal to penny-pinchers as well as eco-conscious consumers. The company claims the equivalent of each can of its soda or liter of its sparkling water costs just a quarter, which is a major savings over soda purchased in stores, vending machines, and other venues.

The SodaStream machines and syrups are available in major U.S. outlets such as Target, Wal-Mart, Bed Bath & Beyond, and Costco, to name just a few.

Why I'm buying
SodaStream's stock has taken a major hit, but that gives us a much cheaper buying opportunity. Let's face it -- the company has great growth potential as more consumers catch on that making soda and sparkling water at home removes expense and heavy lifting out of their lives.

The shares are far reduced from their 52-week high of nearly $80; they currently trade at about $32. Last year, I balked at the fact that SodaStream shares were trading at 74 times trailing earnings, a huge premium to other soda purveyors. They now trade at a far more reasonable 20 times trailing earnings, and just 12 times forward earnings.

SodaStream's PEG ratio of 0.48 also signals an undervalued stock. This is a great bargain for a company that's not only increasing its profitability, but has also been increasing revenue at double-digit percentages for several years. In the past 12 months, SodaStream increased sales by 39.4% and increased per-share earnings by 55.1%.

Weirdly enough, SodaStream's shares have been slammed so badly that it actually looks like a better deal than many of its more venerated rivals. Coke's trading at 16 times forward earnings and sports a PEG ratio of 2.30. Pepsi (which also has a space in this portfolio) is currently trading at 15 times forward earnings and has a PEG ratio of 3.42. Dr Pepper Snapple trades at 13 times forward earnings and sports a PEG ratio 2.17.

Remember, for all that companies like Coke and Pepsi are venerated, they're also very mature. They've become so ubiquitous that it's difficult for them to achieve the kind of growth that newer companies can.

Another upstart, Monster Beverage (Nasdaq: MNST  ) , also comes up with a hefty price tag; it trades at 29 times forward earnings and has a PEG ratio of 2.37. SodaStream's looking like the best bargain out there.

And now, the risks
SodaStream obviously has extremely mature and well-heeled competition; some people would come to blows over whether they prefer Coke or Pepsi, after all. It's difficult for upstarts to find the same type of loyalty.

One of SodaStream's most important growth angles is attacking the U.S. market for soft drinks. This has required different skills than it used to market its product in Europe.

And when you want to consider how difficult it is to face off against entrenched competition, see the fate of Jones Soda. It's just a sad penny stock now, and it hasn't reported a profitable year since 2006.

Another challenge SodaStream faces is whether American consumers will be willing to exchange their used CO2 cylinders for filled ones, and the company also has to work to establish relationships with strong retailers that are willing to aid in the reverse logistics for that process.

The company's Israeli headquarters adds some risk for this company, too; it's smack-dab in a very challenging geopolitical region.

Last but not least, I wouldn't describe SodaStream as a company with an impenetrable moat, although its brand appears to be catching on with plenty of people through word of mouth and advertising. With any product like this, though, investors must be aware that popularity could prove faddish instead of long-lasting.

The Foolish bottom line
SodaStream is squaring off against challenges to change the way consumers think about soda, but it also faces an exciting opportunity to give Americans a cheaper, more environmentally friendly way to quench their thirst. And now, the price is right, too.

You can track any of the stocks here using My Watchlist, a totally free service offered by The Motley Fool that keeps you current on all the news and events that relate to the companies you care about most. Start today using the following links -- it's totally free today.

Alyce Lomax owns no shares of any of the companies mentioned in her personal portfolio. The Motley Fool owns shares of SodaStream International, Coca-Cola, PepsiCo, and Costco. Motley Fool newsletter services have recommended buying shares of SodaStream International, PepsiCo, Monster Beverage, Bed, Bath & Beyond, Costco, and Coca-Cola and creating a diagonal call position in PepsiCo and Wal-Mart. The Motley Fool has a disclosure policy.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (18) | Recommend This Article (19)

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 June 04, 2012, at 7:32 PM, flapjackkittykat wrote:

    I'd be interested to hear what anyone thinks about the sparkling water angle when it comes to SodaStream.

    I can see why soda drinkers might stay away from (or give up on after a while) SodaStream because of taste issues, like the article mentioned.

    But one market that that wouldn't be affected by that is the sparkling water market, because of course, there's little or no taste difference between homemade and store bought sparkling water.

    It would seem that a SodaStream machine would be perfect for about 90% of people who regularly buy sparkling water.

    Is it a big market, for sparkling water?

    And then there are those lightly-flavored sparkling waters that would be easy to replicate at home, and thus also might be given up easily due to the probable lack of brand/taste loyalty. I'm thinking of the lemon, lime, tangerine, raspberry flavored sparkling waters that I see at Trader Joe's.

  • Report this Comment On June 05, 2012, at 8:33 AM, landoncz wrote:

    Another incorrect article on Motley Fool referencing SODA's PE numbers. Please show me how you get a PE of 20.

    2012 estimate is $2.18 / $32 = a P/E of 14.

  • Report this Comment On June 05, 2012, at 9:56 AM, TMFLomax wrote:

    landoncz, that was the trailing P/E ratio.

    Alyce

  • Report this Comment On June 05, 2012, at 2:32 PM, snafflekid wrote:

    My friend bought a SoadStream simply to make carbonated water. The syrup is little used by him.

  • Report this Comment On June 05, 2012, at 4:55 PM, randtm8 wrote:

    I too also bought my machine to make sparkling water. Decided it was ridiculous to spend more than 89 cents for a two liter bottle of the stuff when they tried to raise the average grocery store price above that. I then tried the diet cola, both regular and caffeine free, syrups and was very surprised how good they were. I think they are just as good as the "big boys". I now make about a liter of each, both colas and one plain sparkling in our house a day. I've had my machine about five years now and still use it all the time. Since I think so much of the product, I've started looking at the stock. Haven't decided whether to jump in yet or not. I could see some people getting the machine and it collecting dust after a while, but I would think many would become big fans like I am. I would be concerned though that many purchasers who become regular users would have the same realization that I did and that is that buying your CO2 from them in those ridiculously expensive small exchange cylinders is a rip off. It's easy to convert your machine to use a standard 5 lb. CO2 tank and your cost then drops by about 80%. I don't know how much of their long term profitability relies on selling the over-priced CO2. I will also add though that while it's probably not a big selling point up front for most people, you do quickly discover how wonderful it is to stop lugging all those bottles home and sending them off in the recycle bin.

  • Report this Comment On June 05, 2012, at 8:35 PM, snafflekid wrote:

    <i>you do quickly discover how wonderful it is to stop lugging all those bottles home and sending them off in the recycle bin.</i>

    My city dwelling has made me begin to consider if I really want Coke enough to lug 12-packs of soda across the block, up the elevator and down the hall to get in my condo.

  • Report this Comment On June 06, 2012, at 5:42 AM, LittleBluestem wrote:

    I had a Soda Stream machine for my young family many years ago, I'd guess 20+, and used it for a short while before our usage "fizzled out." I remember it being advertised fairly well at the time but haven't seen it in an ad since I can't remember when. In fairness, though, we don't have cable TV anymore and watch nearly zero television. I do consider this product faddish. Soda is also an extreme rarity in our home now, pretty much reserved for infrequent outings to "fat food" restaurants. I think the alternative use for sparkling water isn't too bad (which we also do not drink) but I'm not sure I'm keen on calling a soda system "socially responsible" in this era of obesity. Best of luck to you though.

  • Report this Comment On June 06, 2012, at 7:08 AM, LittleBluestem wrote:

    A couple of other thoughts: you mention Soda Stream products being sold in several discount stores, (specifically Target, Wal-Mart and Costco) which in my experience sell name brand sodas cheap and private label sodas really cheap. Doesn't that make for stiffer competition for Soda Stream while being no-lose for the retailers?

    Second, you state the P/E is 20x TTM and 12x forward. Am I reading that you are anticipating a tough earnings year ahead for SODA?

    TIA.

  • Report this Comment On June 06, 2012, at 7:15 AM, LittleBluestem wrote:

    <i>"Second, you state the P/E is 20x TTM and 12x forward. Am I reading that you are anticipating a tough earnings year ahead for SODA?"</i>

    eccck...sorry...I'm reading that backwards...that's what I get for trying to think numbers before I've downed my first cup of coffee!

    ;-)

  • Report this Comment On June 15, 2012, at 2:02 PM, NE43 wrote:

    I have had one of these for several years and love it -- started when it was SodaClub. That said, I don't know that it belongs in a "socially responsible" portfolio. There is a boycott against the product as the canisters are manufactured in the West Bank. It's a dilemma for me.

  • Report this Comment On June 15, 2012, at 3:51 PM, TMFLomax wrote:

    Thanks for all the thoughts everyone! And NE43, thanks for pointing out the West Bank element of this one. One of our community members also pointed out to me that social responsibility might also take a hit due to the link between sugary sodas and obesity, so it's good to hear these arguments. This is what makes SRI interesting and complex (and difficult at times!)

    Best,

    Alyce

  • Report this Comment On June 18, 2012, at 5:53 PM, mmmm101 wrote:

    don't see how the obesity, sugary issue is, well, an issue? 1) didn't know we were policing what others drink. 2) policing doesn't work. 3) in line with 2, if SS not available consumers will buy from Coke, Pepsi, etc. Anyone policing them? Me thinks not.

    SS = billions of bottles out of landfills, streams, lakes, oceans; less usage of energy, chemicals, petroleum products. What's the issue?

    I use mine with fresh limes and lemons. Once in a while I treat the kids to various syrups just as I would by them a soda once in a while. I also like the red raspberry italian soda syrups occasionally. We don't use it a lot, but when we do we are thrilled with the convenience and feel great about it's eco-friendliness.

    Sorry, I don't know about West Bank. Someone please explain... nicely, please. Thanks

  • Report this Comment On June 19, 2012, at 12:39 PM, TMFLomax wrote:

    mmmm101, I don't happen to have a huge problem with sugar myself, but there do seem to be growing trends against sugar/high-calorie foods and beverages due to the health ramifications (and costs) of the obesity epidemic in America. Coke, Pepsi, and other food and drink manufacturers face that same risk.

    As for more about the West Bank, here is a clip from SodaStream's own 20-F filing with the SEC: "As our principal manufacturing facility is located in disputed territory, rising political tensions and negative publicity may negatively impact demand for our products or require us to relocate our manufacturing activities to other locations, either of which may adversely affect our business.

    Our principal manufacturing facility is located in Mishor Adumim, an area in the West Bank that is the subject of dispute between Israel and the Palestinian Authority. Mishor Adumim is currently under Israeli jurisdiction and authority. There has recently been negative publicity, primarily in Western Europe, against companies with facilities in the West Bank. A number of political groups have called for consumer boycotts of Israeli products originating in the West Bank, including our products."

    More info on page 17 on of the filing:

    http://www.sec.gov/Archives/edgar/data/1502916/0001144204120...

    There is a great deal of conflict and controversy in that region, so that is definitely a risk and an issue to be aware of at the very least.

    Best,

    Alyce

  • Report this Comment On June 19, 2012, at 1:02 PM, TheDumbMoney2 wrote:

    My understanding is that many of the workers in the factory are Palestinians. So the other way to think of it is that this company is employing Palestinian workers and thus helping with Palestinian unemployment/economy, etc.

    DM

  • Report this Comment On June 19, 2012, at 2:12 PM, TMFLomax wrote:

    Thanks for adding that DM! That's fascinating too (and positive). Although I also saw noted in the risk factors part of the filing that the Palestinian Authority might forbid Palestinians from working at such companies. Very complex issues here...

    Alyce

  • Report this Comment On June 19, 2012, at 2:41 PM, TheDumbMoney2 wrote:

    True. And the other thing is that because of extent to which Sodastream relies on European sales, this is a problem, b/c Europeans are a lot more reflexively "anti-Israel" than Americans are, and view the Palestianian/Israeli situation, in my view, quite a bit to simplistically as analogous to South African apartheid. There has been a major supermarket-chain boycott in Sweden within the last year, actually.

    That also highlights one of the main reasons I think Sodastream has actually traded at such a depressed valuation (in addition to geopolitical risk and GMCR comparisons), which is that it is trading as a "Eurozone stock," both because of its sales there, and because until recently it reported results in Euros. In this regard, note too that its largest European market is Sweden....which is not actually a user of the Euro currency, even though it is in the zone.

    DM

    I'm a user and an investor since $41.70, more than doubling up at $28.50. We basically only use the machine for carbonated water (including in the batter to make fried zucchini blossoms..., yum) and for the esther flavorings.

  • Report this Comment On June 19, 2012, at 9:16 PM, haysdb wrote:

    I gave up soda three years ago. Discovered SodaStream two years ago and now drink fizzy water every day, usually with a squeeze of lime or lemon. I've become a big believer in the product and feel good about owning a piece of this company,

  • Report this Comment On June 21, 2012, at 10:31 AM, griderX wrote:

    I would be be worried investing in a company whose product I see in the deeply discounted section of major retailers.

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