SodaStream Adds Another Notch in Its Flavor Belt

Shares of SodaStream International, Ltd. (NASDAQ: SODA  ) may be flirting with fresh 52-week lows right now, but that doesn't mean the fast-growing company is sitting on its hands.

On Wednesday, SodaStream announced a strategic agreement with juice extraordinaire Welch's, under which the two companies will launch a new line of sparkling drink concentrates for SodaStream's at-home carbonation systems. The press release didn't specifically outline how many new flavors the deal includes, but it did confirm the products will be available in the second half of this year.

So what's the big deal?

Welch's and SodaStream are teaming up. Image source: SodaStream.

After all, this is the fifth such flavor partnership announced by SodaStream over the past year alone, building on previous deals with brands including Del Monte, Cooking Light, EBOOST, and Ocean Spray Cranberries. Before that, SodaStream had already signed agreements with the likes of Country Time Lemonade, Campbell, and Kraft. And that's not to mention the dozens of syrups SodaStream already offers under its own brand or its recently unveiled single-use flavor capsules in SodaStream Caps. 

But that's exactly the point.

This deal with Welch's may "just" be one of many, but it also fits beautifully into SodaStream's efforts to offer healthier options to traditional soda, while at the same time enabling it to take up as much shelf space as possible. And by bringing another iconic brand like Welch's on board, SodaStream not only is enticing existing customers to use their carbonation systems more often, but also can convince more on-the-fence consumers to purchase a SodaStream system in the first place.

Of course, that's not to say consumers aren't already adopting SodaStream's solution en masse; despite projecting a disappointing Q4 profit earlier this month, sales during SodaStream's holiday quarter rose 26% year over year.

And while we're still waiting for more details on how SodaStream plans to restore margins in the coming year, last quarter's sellout numbers make it clear those buyers are using systems more, with gas refill unit growth of 157%, flavor unit growth of 53%, and soda maker sellout of 12%. If the last figure seems low, note that CEO Daniel Birnbaum was quick to point out it was a "tough comparison" given SodaStream's massive launch at Wal-Mart in Q2 of 2012.

What's an investor to do?
With SodaStream shares currently trading at just 15.8 times next year's estimated earnings -- or a solid discount to the forward P/E ratios of both Coca-Cola and PepsiCo -- I think the stock looks like an absolute bargain.

Now I'll admit both Coca-Cola and Pepsi are industry stalwarts that generate gobs of cash, pay healthy dividends, and won't go away anytime soon. But don't forget SodaStream still maintains its goal of nearly doubling sales to $1 billion by 2016. Over the long term, SodaStream also remains intent on increasing its household penetration to at least 10% in every country in which it operates -- something it has already done in Sweden, Finland, the Czech Republic, and Israel.

The bigger question remains, then, whether it will be able to replicate that success in the U.S., where it held roughly 1% household penetration last year. In the end, though, given the product's compelling value proposition and the relatively tiny revenue base on which SodaStream is building, I like its chances.

After all, assuming SodaStream's current margin woes are only temporary, even achieving a fraction of its 10% goal here would represent a huge win for investors.

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