Buying More SodaStream Despite Syrup Shock

It's hard to find stocks that look particularly undervalued in today's bullish -- and arguably fizzy -- market. However, SodaStream International (NASDAQ: SODA  ) (NASDAQ: SODA  ) is refreshingly cheap following investors' sudden, and probably temporary, burst of pessimism. That's why I'm adding even more shares to the real-money Prosocial Portfolio I manage for Fool.com.

I bought shares of Israel-based SodaStream for the second time in October. However, the stock tanked shortly afterward, as many investors fretted about disappointing quarterly results and panicked about weak syrup sales and lower revenue guidance from the maker of home soda-producing machines.

Like many investors, I was bummed that I didn't get shares of SodaStream at the ensuing cheaper price. But since the situation hasn't changed my overall long-term investment thesis, I'm going to add more shares to the portfolio.

Getting over a taste of pessimism
The Prosocial Portfolio's philosophy -- finding solid long-term companies that take socially responsible elements into consideration -- reduces the number of choices as well. Even though the universe of such stocks is expanding rapidly, there are still many companies that don't strongly reflect these qualitative values for the long haul.

SodaStream's fall from grace illustrates overall investor pessimism about this company, which still has plenty of room for growth in consumers' lineup of useful home gadgets.

Even though investors found a lot to dislike in the relatively young company's third-quarter results, there's not much to indicate a reason to panic. Revenue increased 29% to $145 million. Net income dipped negligibly to $16.4 million from $16.8 million on a quarter-over-quarter basis.

With the exception of the Asia-Pacific region, revenue grew in all of SodaStream's geographies. The company is also moving into plenty of other flavors on its own and through partnerships, and these may not have gotten completely on customers' radars yet. In addition, another important part of its business, CO2 canister refills, increased by 34% on a year-over-year basis.

More stores, more syrups
Whether SodaStream's core self-branded syrups need improvement is definitely a concern. However, the company has established relationships with well-known brands like Ocean Spray and Mondelez International's Country Time Lemonade, Crystal Light, and Kool-Aid. It's also trying to attract the party-hearty crowd with its Happy Hour line of cocktail mixers: cosmopolitan, margarita, pina colada, and strawberry daiquiri.

SodaStream also hits on America's interest in healthy alternatives, since its products focus on sweeteners like cane sugar and sucralose, the latter of which is often seen as a better alternative to other diet sweeteners.

And SodaStream creates plain old bubble water, too. Its business also includes CO2 canister sales; CO2 makes the water bubbly. These canisters are available for purchase, and if consumers exchange their spent canisters they get discounts, which fits into both the environmentally minded reduction of waste as well as consumers' budget consciousness.

Another bullish aspect of SodaStream is its increasing presence in major retail stores such as Wal-Mart, Bed Bath & Beyond, Staples, Target, and Macy's.

Interestingly, according to management on the third-quarter conference call, Best Buy included SodaStream in its advertising of its own volition, and Wal-Mart has called it a momentum brand.

Running down a few risks
For many first movers, imitation may be a form of flattery, but it's also a form of extreme risk, especially coming from well-established companies. Green Mountain Coffee Roasters (NASDAQ: GMCR  ) , which provides the Keurig single-serve coffee machine, filed an application this summer for a trademark for the name "Karbon," a product widely expected to be a direct competitor to SodaStream's do-it-yourself soda machines.

Beverage giant Starbucks (NASDAQ: SBUX  ) plans a product called Fizzio, which similarly carbonates beverages. Investors are probably forgetting, though, that the Fizzio appears to be intended for the institutional market at first, not the household market, although it could branch out into other areas. 

So far, there hasn't been any movement on the make-your-own soda front from either of these big-name companies in terms of actually getting a product on the market. SodaStream still has an edge with an existing product that's already on many major retailers' shelves, increasing distribution and brand recognition. Still, there is certainly the risk that this attractive, nascent niche will be targeted by biggies with big pocketbooks.

Another more logical risk to keep an eye on is SodaStream's inventory, which increased by 40.3% on a year-over-year basis in the third quarter. When inventory increases at a faster rate than sales, it can indicate a buildup of unsold products. SodaStream attributes the increase to the acquisition of its Italian business and business growth. This will be a good area to revisit going forward, with particular emphasis on the holiday season.

Getting a refill
Growth stocks often get slammed when investors get any impression of negative tidings. But when you still feel strongly about the company's future, this is one of the best times to buy or add to your position.

I don't always anchor on price when I purchase stocks; some of the stocks in the Prosocial Portfolio strike me as good buys regardless, as long as investors believe in the long-term growth story and plan to hold for long periods of time. Stock-price seesaws and changing investor sentiment can sometimes cause fears about whether fundamental businesses are well positioned for the very long haul or not.

Like many investors, I'd certainly prefer to get good deals when I can find them. Right now, I'm finding a good deal in SodaStream.

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Read/Post Comments (9) | Recommend This Article (9)

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 02, 2014, at 1:45 PM, exit23nyt wrote:

    Sorry Alyce but you're crazy. This stock is done.

  • Report this Comment On January 02, 2014, at 4:31 PM, jedargan wrote:

    exit23nyt wrote

    "Sorry Alyce but you're crazy. This stock is done."

    Thanks for such an insightful and helpful comment. I like the way you clearly refuted each point Alyce made. I'm looking forward to more of your shrewd advice.

    jed

  • Report this Comment On January 03, 2014, at 10:03 AM, rockaround wrote:

    The only comment I have is the ceiling high stack of them at Costco. They started out in a mid store location. Now they are at the entrance with a big discount. Wish I knew how long it took Green Mountain to get traction. It would help me make up my mind whether to buy it back. Maybe this is part of the growing process.

  • Report this Comment On January 03, 2014, at 12:29 PM, jmbring wrote:

    hey Alyce,

    i'm interested to know how you square buying SODA for the Prosocial Portfolio with the fact that their main facility is built in a West Bank settlement - an action considered illegal by essentially every nation of the world but Israel.

    i'm asking a question and not assigning fault - i currently own SODA myself but am fairly certain i will need to sell in good conscience.

    first, the illegal factory - i tend to believe Sodastream located there because of the substantial business advantage, not sociopolitical conviction. still, it's part of the West Bank stranglehold the world community opposes.

    second, they employ a large number of Palestinians in the West Bank. because non-Israelis working in settlements require a permit which may be permanently revoked at any time, for any reason, without appeal, there's good reason to believe Palestinian workers in the West Bank are not treated fairly because they are essentially gagged. there are reports of poor treatment in the West Bank, including at SODA's facility, but it's hard to say what's actually happening of course, because any Palestinian that wants to remain employed can't say a word non-anonymously. my view is that at the very least Palestinians aren't paid fairly because there's no incentive for any West Bank employer to do so...and that's part of the reason business is good there, naturally.

    i think pro-socialcapitalists need to sell SODA...

    Mark

  • Report this Comment On January 04, 2014, at 10:19 AM, figglebird wrote:

    If you truly understood the situation, which you obviously do not, you would know, as any Soda Long does that they are closing down that factory in the coming year.

    Best of luck.

  • Report this Comment On January 05, 2014, at 9:09 PM, jmbring wrote:

    figglebird,

    i've heard no word of plans to close the Maale Adumim facility; a search of SODA's IR page says nothing of the sort, and a Google of the web turned up nothing but a mention by a current anonymous worker that the plant is rumored to close. and to the contrary, as recently as November no less than George Mitchell was praising that very plant's existence.

    if the plant is actually closing, there is no obvious public mention of it and your smugness is doubly unjustified (your attitude isn't reasonable in any instance to begin with).

    perhaps you'd care to enlighten us with your source of this news? because it's clear you've forgotten, TMF's purpose is to amuse/educate/enrich, and for those like yourself who are oh-so-much smarter than the rest, it's your burden here to help, not belittle.

    Mark

  • Report this Comment On January 10, 2014, at 5:47 PM, AnotherFool18 wrote:

    I wasn't a fan of this pick when you recommended it in October 2013. But now that the stock has dropped another 20% since then I may actually add a position.

  • Report this Comment On February 05, 2014, at 7:28 PM, JayAF wrote:

    I could not agree more with jmbring.

    I see the 'Prosocial' angle of how people making their own fizzy drinks at home saves on packaging. This reduces waste as well as the energy and resource costs of producing plastic and aluminium bottles/cans.

    But surely making the world that tiny bit greener cannot weigh up against operating a factory in illegally occupied territory.

  • Report this Comment On February 21, 2014, at 6:43 PM, Chipster wrote:

    I was combing through Ms. Lomax's Commentary and analysis, waiting for her to hit on this very Socia-conscientiousness issue. Was surprised to find she never did, especially considering the big kerfuffle in the media re: Scarlett Johannson, etc. Some seemingly confused understandings and opinions have surfaced here, so I went hunting. Here are some links to perspectives for consideration. There doesn't seem to be an intention to close the plant in question. There is also another plant being developed in Arab-Israeli territory that raises similar questions. We will each draw our own conclusions. I think Ms. Lomax should speak to the issue and offer her perspective.

    https://www.google.com/search?q=sodastream&rlz=1C1RNNN_e...

    http://www.nytimes.com/2014/02/11/world/middleeast/palestini...

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