SodaStream Just Raised the Bar... Again!

Offering earnings guidance above analyst expectations is obviously a bullish sign, as over time earnings growth follows sales growth. And when a company predicts greater sales or profits, we expect its stock price to soon follow.

Last week DIY soda jerk SodaStream International (Nasdaq: SODA  ) said it believes full-year revenue will grow 46% over 2011 and profits will rise 59%, much better than the 40% and 55% growth, respectively, it previously guided to. Now don't go blindly buying on its bullish report -- you still need to do some research. Use the announcement as a jumping-off point for additional research instead.

SodaStream International snapshot

Market Cap

$724 million

Revenues (TTM)

$392 million

1-Year Stock Return

9.3%

Return on Investment

17.3%

Estimated 5-Year EPS Growth

30%

Dividend & Yield

N/A

Recent Price

$35.96

CAPS Rating (out of 5)

**

Source: Finviz.com. TTM = trailing 12 months. N/A = not applicable; SodaStream doesn't pay a dividend.

Fizz from its pop
This is the fourth straight quarter this year that SodaStream has raised guidance over its previous expectations. Yet despite that achievement, the stock is up only 10% year to date compared to a 9% rise in the S&P 500. When you're essentially just keeping pace with what the broad market is achieving even as you're constantly raising the bar, there's something more at play here.

From starter kits to consumables like CO2 and flavorings, SodaStream has found traction this year, generally recording growing sales in each area. Last year there was some concern that growth was slowing, but that hasn't been borne out by reality, as broader distribution agreements with Wal-Mart (NYSE: WMT  ) and flavor deals with Kraft Foods (Nasdaq: KRFT  ) and now Campbell Soup (NYSE: CPB  ) have boosted sales.

Aside from criticism that it's little more than a fad brought on by the health-foods movement, it seems most investors fear it will blow up like Green Mountain Coffee Roasters. Where the coffee maker had some strong patents that protected its position for some time, once they expired there was little moat.

A shallow moat
Unfortunately, SodaStream doesn't even have that. It admits its patent portfolio is limited and what little protection it has will be expiring soon (though it doesn't provide any timeline). It's tried to ward off that cliff by introducing some design protection (i.e., "SodaCaps" flavor capsules; a new designer machine; "Snap-n-Lock" connecting mechanisms; and LED displays), but these are hardly moat-building advances.

Thus far, DIY competitors are few and far between, limited to much smaller and weaker competitors like Primo Water (Nasdaq: PRMW  ) . The real battle is against the established players like Coca-Cola (NYSE: KO  ) , PepsiCo (NYSE: PEP  ) , and Monster Beverage  (Nasdaq: MNST  ) .

As an Israeli company it also suffers from fears of the euro-crisis weighing on operations, and though the U.S. may ultimately prove to be its biggest market, Western Europe accounts for just under half of its sales (down from 51% last quarter and 55% a year ago).

Going flat
While I've been cured of my notion that SodaStream is a fad, its position as a niche market leader suggests that there are constraints as to how much it can grow. The heavily shorted stock could get a bounce if shorts are forced to cover, but that's hardly a reason for a long-term investment. Let me know in the comments box below if you think the soda jerk will make a jerk out of me for doubting its potential.

Raise your sights
I'll admit I'm in the minority when it comes to being bearish on SodaStream's carbonation technology. The bulls have long claimed ownership over this razor-and-blade company, believing it offers an intriguing opportunity for growth that may be harder to duplicate than you might think. The Motley Fool's premium report on SodaStream explains the opportunities as well as the risks in the company. The report comes with a year's worth of updates, so just click here to get started.


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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 November 14, 2012, at 7:32 PM, haysdb wrote:

    In another quarter or so their earnings will start forcing the stock price up. The P/E is already down to 17.6. How low can it go with the company growing profits 50% per year? Pretty soon it will be priced like a dividend paying utility.

  • Report this Comment On November 16, 2012, at 5:27 PM, jimmy4040 wrote:

    Since it's produced in the West Bank, using Palestinian labor, your risk just jumped out of the park in the last two day.

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