Is SodaStream Now a Buy?

On Monday, SodaStream (NASDAQ: SODA  ) saw stock losses of 25% after a very disappointing preliminary earnings report for 2013. As a result, SodaStream is now trading at 52-week lows, but given this pessimism, is it presenting a better investment opportunity than the likes of Coca-Cola (NYSE: KO  ) and PepsiCo (NYSE: PEP  ) ?

Why the fall?
So, the questions regarding SodaStream are: Just how bad are the numbers, and what was said to create so much pessimism?

First, the below chart shows what SodaStream expects from 2013 along with its year-over-year increase from 2012.

Metric   Amount

Year-Over-Year Increase

Revenue

$562 million

28.8%

Adjusted net income

$52.5 million

20%

As you can see, the numbers above are pretty solid, representing rather impressive growth. However, there are a few more headlines to note, things that go beyond top- and bottom-line results.

First, adjusted net income shows a 20% gain over 2012, but if we look at net income alone, it is actually near flat, thus implying significant margin declines.

Second, the PR was short and sweet, but management did note that costs were higher and that sell-in prices were lower, meaning the company had to lower the price to create higher volume. Therefore, many wonder if primary markets are approaching a peak in demand.

These two points are important in explaining why SodaStream's stock would've fallen despite such strong growth.

Yet given these problems, and the CEO's statement that negative headwinds could continue through the first half of 2014, he also said measures are being taken to restore peak margins in this current year, implying improvements.

Is it worth buying?
When it's all said and done, we're talking about a company that demonstrated very impressive growth in 2013. In fact, if we look at analyst expectations for 2013, SodaStream was just $1.3 million shy of meeting the target, which most would consider very good.

Moreover, when you look at the problems noted by SodaStream management, including pricing pressure and weaker demand, these are issues found within the soft drink industry.

For example, Coca-Cola has struggled for the better part of 16 months with low case volumes and declining margins. In Coca-Cola's last quarter, its case volume increased 2% year over year, yet total sales declined 2.5%, thus showing an impact of lower prices caused by a decline in demand.

PepsiCo did achieve growth of 1.5% in its last quarter. However, it also saw pricing pressure and a drop in margins. Moreover, PepsiCo's growth was not driven by soft drink sales, but rather 3% growth in the company's snacks division.

Coca-Cola and PepsiCo's soft drink woes are directly tied to increased competition and consumers who are electing to choose healthier, less sugary drinks. In many ways, this benefits SodaStream long-term, as its beverages have healthier ingredients.

Still, the entire beverage industry, or at least soft drinks, have experienced the same problems, but that doesn't mean investors aren't still buying Coca-Cola or PepsiCo. With that said, investors should note that companies with greater growth are universally awarded higher valuation multiples versus those with less growth. This fact might support an investment in SodaStream, as seen in the chart below.

Metric 

SodaStream

Coca-Cola

PepsiCo

2013 sales growth

29%

(1.1%)

1.5%

2014 expected sales growth

18.6%

4.1%

4.3%

Price/sales ratio

1.5

3.7

1.9

P/E ratio

17.0

20.6

19.5

As you can see, SodaStream is growing many times faster than either Coca-Cola or PepsiCo, but is priced significantly cheaper. As an investor, this is typically your first indication of value, but usually, when comparing a growth company to its larger peers, the disconnect in valuation is not this wide.

Moreover, take a look at the differential between Coca-Cola and PepsiCo. The latter is clearly growing faster and is also significantly cheaper. Thus, investors might find more value in shares of PepsiCo, a company that often takes a backseat to its peer.

Final thoughts
While shares of SodaStream took a major hit on the full-year earning results, we can see that the company is now priced very attractively. Granted, it's impossible to say whether SodaStream will trade higher tomorrow, next month, or this year, but eventually, value to this degree almost always results in large gains.

Our top stock for 2014
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (3) | Recommend This Article (1)

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 17, 2014, at 3:53 PM, adamwins76 wrote:

    The soda industry is entering a new paradigm right now. $SODA will either be a huge hit, or a passing fad. I like the product but the stock's performance has been incredibly disappointing. That said, I would not buy $KO. I still think $PEP is a buy though because of its diverse and popular product line (salty snacks!).

  • Report this Comment On January 18, 2014, at 9:34 AM, BrianNichols wrote:

    I agree with you. I would not buy KO either. They need a snack line

  • Report this Comment On January 19, 2014, at 8:02 AM, Ostrowsr wrote:

    Just like Amazon, this company is investing in future growth and market share gain.

Add your comment.

DocumentId: 2799374, ~/Articles/ArticleHandler.aspx, 7/29/2014 10:59:15 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement