Is It the Right Time to Invest in SodaStream?

SodaStream is having a tough year, but the company is still growing at a considerable speed and valuation looks quite attractive. Is it the right time to invest in SodaStream?

Feb 27, 2014 at 11:46AM

Soda Image

Source: SodaStream.

SodaStream (NASDAQ:SODA) is having a tough year, and the alliance between Coca-Cola (NYSE:KO) and Green Mountain Coffee Roasters (NASDAQ:GMCR) represents a considerable risk for the company. However, SodaStream is still generating substantial growth and disrupting the gigantic carbonated drinks market. Besides, the stock is trading at attractive valuation levels. Is it the right time to invest in the home soda pioneer?

Still sparkling
The company had already warned investors about the tough holiday quarter, so expectations were quite low leading to the report. That's the main reason both sales and earnings came in above expectations when the company announced results on Wednesday, even if profit margins were under heavy pressure during the period.

Revenues during the fourth quarter of 2013 grew 26.4% to $168 million, but EBITDA decreased 45.2% to $5.9 million from $10.7 million in the fourth quarter of the previous year. Net income also declined steeply from $7.5 million to $0.7 million during the quarter.

The holiday season has been notoriously tough in terms of pricing, and SodaStream is prioritizing household penetration over profit margins. In addition, alternative distribution channels like the Home Shopping Network produced extra pricing pressure during the quarter.

SodaStream was also affected by rising costs due to higher than anticipated product reconfiguration expenses. The conversion of starter kits to mega-packs, the shift from brick-and-mortar to direct-selling channels, and the redeployment of inventory from the U.S. to Canada were responsible for this increase in reconfiguration expenses.

On the other hand, the company is still generating substantial unit growth, starter kits sales increased by 39%, units of carbonator refills grew 25%, and flavors units were up 32% during the quarter. Starter kits sales are encouraging in terms of showing that the company keeps gaining more clients, but growing sales of consumables are perhaps more important as it reflects active consumption from customers, and consumables also carry far higher profit margins than starter kits.

SodaStream is still successfully expanding and disrupting the worldwide carbonated beverage industry, which management estimates to be worth around $260 billion, so the company has enormous room for growth in the coming years if it continues moving in the right direction.

Everyone has the right to make a mistake
CEO Daniel Birnbaum said during the press conference that everyone has the right to make mistakes. He was not talking about SodaStream's missteps during the last quarter, but about Coca-Cola's decision to partner with Green Mountain Coffee Roasters to enter the home soda category.

Coca-Cola bought a 10% stake in Green Mountain Coffee Roasters, for $1.25 billion. The companies have also signed a 10-year agreement to collaborate in the development and introduction of Coca-Cola's products for use in Green Mountain's forthcoming Keurig Cold machine, which is expected to be launched during the company's fiscal 2015, beginning in October 2014.

Coca-Cola is the undisputed global leader in soft drinks, and the fact that it has chosen to align with Green Mountain represents a reason for concern for SodaStream investors.

On the other hand, this move could also provide validation for the home soda category, and Coca-Cola is unlikely to choose a low price strategy to compete, so this could turn out to be a positive factor for SodaStream in terms of margins.

It's far too early to tell how the competitive dynamics between SodaStream and Green Mountain's new products will play out, but it doesn't need to be a negative for the company. It is, however, a considerable source of uncertainty to monitor.

Buying opportunity?
Falling profit margins and increased competitive pressure mean that SodaStream is becoming a more risky investment lately. However, this uncertainty seems to be already reflected in the stock price since SodaStream is trading at attractive valuation ratios from a historical perspective.

Soda

Source: YCharts.

As long as the company continues generating growing sales and gaining market penetration, there are valid reasons to expect recovering profit margins, especially if management leaves recent mistakes in the past. Under such a scenario, SodaStream could offer substantial upside potential.

Bottom line
SodaStream is going through a challenging period, and competition is an important risk to monitor in the medium term. However, the company is still on the right track when it comes to capitalizing on opportunities for growth in the gigantic carbonated beverages industry, and valuation is quite attractive at current levels. The company's recent setbacks could easily turn out to be a buying opportunity for long-term investors.

Transform your portfolio with this long-term investment
Opportunities to get wealthy from a single investment don't come around often, but they do exist, and our chief technology officer believes he's found one. In this free report, Jeremy Phillips shares the single company that he believes could transform not only your portfolio, but your entire life. To learn the identity of this stock for free and see why Jeremy is putting more than $100,000 of his own money into it, all you have to do is click here now.

Andrés Cardenal owns shares of SodaStream. The Motley Fool recommends Green Mountain Coffee Roasters. It recommends and owns shares of Coca-Cola 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers