SodaStream International Ltd. Earnings: Is the Future at Risk?

SodaStream International (SODA) will release its quarterly report on Wednesday, in the face of the specter of strong competition that has reared its ugly head in recent months. With home-brew giant Keurig Green Mountain (GMCR.DL) having formed a partnership with beverage behemoth Coca-Cola (KO 0.27%) connected to its planned Keurig Cold carbonated beverage offering, SodaStream has to figure out how to respond in the time left before the new system comes on the market.

SodaStream has sought to become a disruptive force in the soda industry, offering substantial cost savings compared to buying pre-mixed soda from Coca-Cola and other manufacturers. But despite its first-mover advantage, SodaStream is faced with the fact that there's not a huge barrier to entry in carbonation technology, and Keurig Green Mountain will have a lot of brand-name power on its side when the Keurig Cold becomes available. How can SodaStream respond? Let's take an early look at what's been happening with SodaStream over the past quarter and what we're likely to see in its report.

Source: SodaStream.

Stats on SodaStream

Source: Yahoo! Finance.

Can SodaStream earnings bubble up this quarter?
Investors in recent months have gotten scared of SodaStream earnings, just about eliminating their profit expectations for the first quarter and cutting their 2014 and 2015 projections by 20% to 25%. The stock has bounced back by 16% since early February, but that has only made up some of its lost ground from early in the year.

SodaStream's fourth-quarter earnings showed the mixed fortunes for the beverage maker, as the report was largely in line with pre-announced guidance that had initially led to the stock's big drop early in 2014. Unit sales were strong, with soda-maker sales up 39%, and consumables also faring well with gains of 32% for flavorings and 25% for carbonators. But in a tough retail environment, SodaStream introduced substantial discounts that weighed on profitability, and had to shift inventory from low-demand areas to places where systems were selling better.

Source: SodaStream.

SodaStream investors continue to focus on the deal between Coca-Cola and Keurig Green Mountain, which many believe could have a monumental impact on the home-soda industry. Keurig's coffee brewers have done an impressive job of penetrating the U.S. household market; if it can match that success with home soda makers, then SodaStream's 1% penetration rate in the U.S. might not look too impressive. Of course, the Keurig Cold could prove less popular than the original Keurig, especially as interest in carbonated beverages has been declining for a while now.

Somewhat surprisingly, the Keurig Green Mountain deal with Coca-Cola has actually had a mixed impact on SodaStream shares. On one hand, the competitive threat is real and potentially devastating. Yet some shareholders have speculated that the move makes it more likely that SodaStream itself might form a similar partnership; given the stock-price movement that Keurig Green Mountain got from the deal, investors hope to see a similar pop in the event of a future deal involving SodaStream. It looks unlikely that Coca-Cola's archrival will have any interest in SodaStream, having denied past suggestions of merger talks. But speculation about a potential team-up between SodaStream and the premier coffee-shop retailer in the world has brought the M&A idea back to life.

In the SodaStream earnings report, watch for signs that the company has managed to reverse its troubling margin deterioration, because without that success, it'll be hard for any acquirer to justify paying up for a buyout. Meanwhile, look for any hints from SodaStream about negotiations or other details of a possible merger, as they could send the stock soaring.

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