Is SodaStream Now a Buy?

SodaStream compares well to peers Coca-Cola and PepsiCo, but is it a buy?

Jan 17, 2014 at 3:30PM

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.

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Fool contributor Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, PepsiCo, and SodaStream. The Motley Fool owns shares of Coca-Cola, PepsiCo, and SodaStream. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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