A 22% Drop in SodaStream Makes It a Compelling Buy

SodaStream is valued cheaply compared to its potential growth. It is much cheaper than both Coca-Cola and PepsiCo. Income investors might also own Coca-Cola and PepsiCo for consistent dividend payments.

Jan 20, 2014 at 10:00AM

SodaStream (NASDAQ:SODA) felt the heat of market pessimism when it experienced a daily drop of as much as 22% right after lowering its full-year 2013 guidance. Consequently, including this significant drop, the 12-month market return for SodaStream is negative, nearly -22%.

During the same time, two of the world's largest soda makers, Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP), enjoyed much better returns of 7.3% and 15.5%, respectively. Although SodaStream offers a cheaper, more convenient way to enjoy soda, it still seems to face challenges in pulling customers away from those two soda giants.

SodaStream posted a disappointing guidance but its innovations could drive future long-term growth
For the full year, SodaStream expected to generate around $562 million, a bit lower than the previous revenue forecast of $567 million. It also reduced the adjusted net earnings estimate from around $63 million to only $52.5 million. Chief executive Daniel Birnbaum blamed the disappointing guidance on the challenging holiday selling season and the lower gross margin, driven by lower sell-in prices, increased product costs, and the negative impact of currency exchange. 

SodaStream has been tapping the huge, global home-carbonation market, which was estimated to be around $260 billion in retail value. With its home beverage- carbonation systems, consumers can drink carbonated soft drinks and sparkling water with different flavors right at home. Over the years, SodaStream has expanded its business footprint globally, at more than 55,000 retail stores in 43 countries around the world.

In order to fuel future sales growth in both consumables and soda makers, the company focuses on innovation in its flavor portfolio. Until the third quarter 2013, SodaStream had more than 60 flavors in the U.S. in its portfolio, including 15 co-branded SKUs (stock keeping units). In the fourth quarter, it expected to introduce the new Happy Hour Cocktail Mixers and 10 new co-branded SKUs along with several launches including Diet Ocean Spray and Cooking Light.

Furthermore, consumers could also enjoy shopping for SodaStream's soda makers and consumables not just via brick-and-mortar retail stores, but they could buy online, via Amazon.com as well.

Scarlett Johansson -- The global brand ambassador
For any consumer-goods product, consistent marketing is the key to raise awareness and promote the products as well as the brand. SodaStream, despite the sluggish earnings guidance, has Scarlett Johansson in its side. With Scarlett Johansson being the company's first "global brand ambassador," many consumers might follow her into trying and increasing the frequency of using SodaStream's soda makers and consumables. Scarlett Johansson has made a very personal, powerful endorsement on the partnership with SodaStream: "I think it was a natural partnership because I've been using SodaStream for five to six years."

A quite compelling play compared to Coca-Cola and PepsiCo
Compared to both PepsiCo and Coca-Cola, SodaStream is the cheapest valued. At around $39 per share, SodaStream is valued quite cheaply in the market, at only 13.4 times its forward earnings. With annual growth of around 20%, I personally do not think the market is overreacting and undervalued the company. The PEG ratio stays quite low, at only about 0.6. On the other hand, Coca-Cola is worth more than 17.9 times its forward earnings and PepsiCo's forward earnings multiple is around 17.6.

However, because Coca-Cola and PepsiCo have much lower expected business growth, their PEG ratios are much higher, at 2.9 and 2.8, respectively. The only catch for investors is their decent and stable dividend payments. While SodaStream does not offer any dividend, Coca-Cola and PepsiCo pay their shareholders dividends with the yield at 2.8% and 2.7%, respectively.

My Foolish take
Income investors might buy and hold Coca-Cola and PepsiCo for their stable annual dividend payments. However, I think with the recent sharp drop, SodaStream should really be taken into consideration. With a very low PEG ratio, a global leading position in the home carbonation market, and a great endorsement from Scarlett Johansson, I think SodaStream could benefit investors significantly in the near future.

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Anh HOANG owns shares in SodaStream. 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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