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SodaStream (NASDAQ: SODA ) saw a near 8% loss in last week's Nasdaq assault, and while much of this loss was due to the company's connection to the index as a whole, it was also in part due to analyst Jim Duffy of Stifel. His points bring about an older argument: The question of whether Coca-Cola (NYSE: KO ) and Keurig Green Mountain's (NASDAQ: GMCR ) partnership -- and to a lesser degree PepsiCo's (NYSE: PEP ) possible innovation -- will be the end of SodaStream.
Stifel versus Tilson
To the surprise of many, SodaStream has traded slightly higher in the months following Coca-Cola's Keurig partnership announcement. These sub-5% gains were created based on the belief that PepsiCo or another beverage giant may partner to utilize SodaStream's technology. However, Stifel's Duffy sees a different outcome, and the firm has a sell rating on SodaStream's stock. Here's the argument:
Coca-Cola's $1.25 billion investment in Keurig will create a make-your-own single-serve soda similar to SodaStream. The increased competition will lead to deteriorating margins for SodaStream. The analyst noted SodaStream's fourth quarter and full-year results, which missed revenue and EPS expectations due to weak retail traffic and discounting. However, it's worth noting that this weak performance still created full-year revenue growth of 29%.
SodaStream will have to increase its spending on marketing to compete with the powerhouse of Coca-Cola and Keurig. The Coca-Cola partnership with Keurig will ultimately lead to a loss of shelf space for SodaStream, meaning a sales decline.
With all things considered, Stifel is expecting a doomsday scenario, one where revenue and profits ultimately fall due to the new competition. However, hedge fund manager Whitney Tilson sees a different outcome, saying that investors discount SodaStream's growing Western European business.
Tilson's research implies that consumers not only use their SodaStream machines regularly, but that the purchasing of new machines remains steady. Specifically, SodaStream sold 1,542 soda maker starter kits in its fourth quarter, which was a 39% increase over the year prior. And in a survey of 167 SodaStream kit owners, conducted by Tilson, 72% of participants claimed to use it at least one time per week. .
So, who's right? Is SodaStream a buy or a sell?
To answer that question, investors must try to put some perspective on the Coca-Cola and Keurig deal in regards to Stifel's comments, which almost implies that SodaStream has no fundamental edge and that it has never faced anything such as Coca-Cola or Keurig competition. This competition will be a new single-serve soda business to complement cans and bottles.
In regards to the fundamentals and consumer demand of each product: SodaStream sports an impressive $0.42 per-liter cost for its products . This would translate into roughly $0.15 per 12-ounce can. In comparison, the average 12-pack of soda in the U.S. sells for $5, or $0.41 per 12-ounce can. And with Keurig's K cups selling for an even higher $0.55 per cup, it'll be interesting to see how Coca-Cola and Keurig price their new products to remain competitive while still saving margins. Granted, Coca-Cola and Keurig do have brand power on their side, but the argument of pricing pressure on SodaStream seem a little premature, especially since SodaStream does have the lowest U.S. cost of the three single-serve options.
Therefore, since much of Stifel's argument revolves around pricing pressure that'll ultimately affect revenue and profit, it looks as though Tilson's call is better supported from a product sales and European growth point-of-view.
Is there value in big beverage?
For the last decade, studies show that Americans are drinking less soda, and while diet sodas used to be a growth driver, sales for this segment have declined rapidly -- nearly 7% last year. During Coca-Cola's last quarter, its overall sales declined 3.6%, and investors have recently expressed frustration at the company's lack of product diversity. Still, the company trades at a rather steep premium of 20 times earnings and 3.6 times sales.
Keurig Green Mountain reported sales last year of $4.4 billion, and is forecasted to grow just 6.8% this year. Its deal with Coca-Cola may in fact spark growth for the company, but it may have to sacrifice margins. At 30 times earnings with slowed growth, the stock looks fully priced for the future.
PepsiCo is the only one of the beverage giants that might present investment value. At 19 times earnings, it's cheaper than Coca-Cola, and thanks to a 3% growth rate from its snack business, PepsiCo is a growing company.
What about SodaStream?
As you can see, none of the large beverage companies are perfect. All have problems, yet SodaStream is one of the most shorted stocks in the market because some don't believe its business model is sustainable. However, it produces the cheapest products, and by containing two-thirds less the amount of sugar and calories of regular soda, it has become popular among consumers who are worried about the health effects of soda.
SodaStream's growth in the Americas did slow to 16% last quarter, but Europe continues to grow at 40%. Despite conservative guidance, SodaStream is still expected to grow 13% in each of the next two years, and trades at a very reasonable 19 times earnings.
SodaStream is outgrowing all of its big beverage peers, yet trades for the same premium, a good indication that the risk is worth the reward.
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