Shares of SodaStream (NASDAQ: SODA ) dropped by more than 10% after the company reported earnings results on Wednesday that disappointed Wall Street analysts. Although there are some valid reasons for concern, the company looks well positioned to outperform the market for years to come.
Sales during the last quarter grew by 29% to $144.6 million, barely below analysts' forecast of $145.2 million. This was the first time that the company missed revenue expectations since its initial public offering in November 2010, and SodaStream still delivered healthy sales growth for the quarter, so overall revenue growth doesn't look like a reason to panic.
Earnings per share were $0.76 during the quarter, higher than the $0.72 forecast by Wall Street analysts on average. EBITDA increased 18% to $21.9 million from $18.6 million in the year-ago quarter, and adjusted EBITDA grew by 23.8% to $24.8 million.
Guidance for the rest of the year was also strong; management expects a 30% increase in revenue for 2013 versus 2012, and adjusted net income, which excludes share-based compensation expense, is expected to grow around 30% too.
Machine sales were quite solid, with a 27% increase in the quarter, and carbonators were even better at a 34% growth rate. This indicates that consumers are not only buying the machines, but also putting them to active use, which is a really good sign in terms of demand health.
All in all, the big picture doesn't look that bad for SodaStream when it comes to both sales and profitability in the last quarter. Strong guidance from management could also be interpreted as a sign of confidence and optimism about the future.
Flavors, on the other hand, were surprisingly weak, with an increase of only 7% during the quarter. Management was quite explicit in blaming vendor inventory reductions for the weak flavor sales, especially in the U.S. CEO Daniel Birnbaum said during the press conference: "To be clear, these were vendor-wide inventory reductions not restricted to SodaStream."
These kinds of things can happen from time to time, and as long as SodaStream demonstrates in the coming quarters that flavors continue to perform as expected, this shouldn't be a big issue for the company.
On the other hand, it's worth noting that soda consumption in developed countries has been stagnant lately as many consumers choose healthier drinks over traditional sodas.
Coca-Cola (NYSE: KO ) reported lackluster volume growth of 2% during the last quarter, and sales of healthier alternatives like bottled water, juices, and sports drinks have been consistently outgrowing sodas for some time, even if Coca-Cola still owns the first and second position in soft drinks with Coke and Diet Coke.
The same goes for PepsiCo (NYSE: PEP ) , which is focusing on healthier alternatives to avoid the negative effects of declining soda consumption. According to PepsiCo CEO Indra Nooyi, carbonated soft drinks now represent 40% of the liquid refreshments category in the U.S. versus 50% a decade ago, so the company is striving to adapt and change via innovation and offering a healthier portfolio of products.
Since SodaStream is selling carbonators at a good pace, it makes sense to give credit to management when it blames inventory issues for the disappointing flavor sales. On a longer term basis, however, investors need to monitor the impact of changing consumer habits away from sodas.
Sales in the Americas and Western Europe regions were quite strong, with revenues growing 29% and 43% in the last quarter, respectively. Asia-Pacific, on the other hand, was a big disappointment, with revenues falling 21% versus the previous year. This was mostly due to weakness in Japan, and management is being quite clear about distribution problems in the country:
We're disappointed that our Japanese distributor is not properly supporting the brand with marketing investments and retail expansion. ... Our execution in Japan is not acceptable and we have to correct it, but it is not indicative of a problem with the Japanese retailer or the Japanese consumer. And we will correct this.
Recognizing the problem and taking responsibility is a first good step; now the company needs to find a better way to do business in Japan in order to reignite growth in the region.
SodaStream is trading at a forward P/E ratio of 17.09, a similar valuation to Coca-Cola and PepsiCo, which carry forward P/E ratios of 17.8 and 18, respectively. Coke and Pepsi are certainly safer and bigger companies offering superior soundness versus SodaStream. And they also reward shareholders with considerable dividend yields of 2.8% for Coca-Cola and 2.7% for PepsiCo.
On the other hand, for a similar valuation, SodaStream provides the opportunity to capitalize much higher growth prospects in the long term. SodaStream has a market capitalization of $1.18 billion versus $130.6 billion for PepsiCo and $175.36 billion for industry giant Coca-Cola.
SodaStream is the innovative disruptor in an industry dominated by stagnant competitors and, even in spite of its difficulties in the last quarter, the company is clearly outgrowing the competition by a wide margin.
Weakness in flavor revenue and falling sales in Japan during the last quarter are important issues to monitor. But the big picture is still looking good for SodaStream, especially if these difficulties prove to be only a transitory slowdown in the company's long-term growth trajectory. For investors who can handle the risk, this innovative growth company could now present a convenient buying opportunity.
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