SodaStream After Earnings: Buy, Hold, or Sell?

Source: SodaStream.

SodaStream (NASDAQ: SODA  ) reported better-than-forecast earnings on Wednesday. However, the company is still facing serious difficulties in the U.S. With Coca-Cola (NYSE: KO  )   and Keurig Green Mountain (NASDAQ: GMCR  )  joining forces to compete in the home-soda business, things could get much more exciting in this key market in the medium term. Is SodaStream a buy, hold, or sell after the recent earnings report?

A mixed bag
SodaStream reported really dismal performance in the U.S. during the last quarter of 2013, so investors expected continued difficulties in that market during the first quarter of 2014. This was in fact the weakest spot in performance: Sales in the U.S. fell by 28% versus the first quarter in 2013, as retailers are still working on reducing their excess inventories.

Performance was much stronger in the rest of the world, though. Sales in Western Europe increased by 17%, revenues in the Asia-Pacific region grew 28%, and Africa delivered an increase of 34% in sales versus the prior year. All in all, total sales were roughly flat at $118.2 million versus $117.6 million in the first quarter of 2013. This was in line with analyst's estimates of $118 million for the quarter.

Falling profit margins had a big negative impact on profitability, and earnings declined from $0.57 per share in the first quarter of 2013 to $0.08 per share. This was widely expected by analysts, though, so earnings per share came in considerably above estimates of $0.01 per share on average.

On a brighter note, carbonator sales were particularly strong during the quarter, with an increase of 22% in unit sales to a record 5.8 million units.

Carbonators sales are usage-driven, and sales of refills don't vary much during the holidays, so healthy demand in that category could be indicating that overall demand weakness is mostly due to problems during the last quarter in 2013 and the remaining excess inventory. As long as consumers continue to put their machines to good use, SodaStream should be able to overcome its problems over the coming quarters.

Management expects sales during 2014 to increase by 15% versus 2013, and EBITDA is expected to grow by 11%, while EBITDA excluding foreign exchange fluctuations is forecast to increase by a much stronger 25% year over year. SodaStream expects net income to grow by 3% during the current year.

Forward-looking guidance is clearly signaling an improvement in the remaining three quarters of 2014, so management seems to believe that SodaStream will be able to overcome its difficulties in the U.S. in the medium term.

Moving forward
Interestingly, the alliance between Coca-Cola and Keurig Green Mountain to enter the home-soda industry could actually be a positive factor for SodaStream in terms of improving performance in the U.S.

Coca-Cola Classic and Diet Coke are the two most consumed soda brands in the U.S., and Coca-Cola has enormous firepower to invest in marketing and advertising. Keurig Green Mountain has been a pioneer in the home-coffee category, so the deal between Coca-Cola and Keurig Green Mountain means that two popular and recognized brands will be entering the home-soda industry.

This will obviously represent a serious competitive challenge for SodaStream, but it will also provide validation for the home-soda industry as a whole and attract customers' attention to the alternatives in the space.

Besides, Coca-Cola will need to be careful in order to avoid cannibalization and conflicts of interests with its bottlers while entering the industry, so the company will most likely compete in the high end of the pricing spectrum. In addition, consumption of traditional sodas is under pressure lately, as consumers move toward healthier alternatives.

If SodaStream can successfully position itself as a lower-cost and healthier alternative to Coca-Cola in the home-carbonation market, the company could actually benefit from the partnership between Coca-Cola and Keurig Green Mountain.

Foolish takeaway: Buy, hold or sell?
Falling sales in the U.S. are still a material reason for concern, but strong international performance and growing carbonator revenues are a healthy sign in terms of overall demand strength for SodaStream. While Coca-Cola and Keurig Green Mountain will represent a considerable competitive challenge for SodaStream, they will also attract attention to the industry, and SodaStream may end up benefiting from this move if it plays its cards well.

SodaStream is clearly a risky investment alternative, but upside potential is also quite high if things turn out as expected. For investors who can handle the short-term uncertainty, a long-term position in SodaStream may outweigh the risks.

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