3 Reasons SodaStream International Ltd.’s Stock Could Rise

SodaStream's down but not out. This soda stock could pop yet again.

Aug 27, 2014 at 5:30PM

The at-home beverage maker SodaStream (NASDAQ:SODA) can't seem to catch a break. Its stock has lost more than 30% of its value so far this year, and there's reason to believe this free fall could continue.

But investors (including myself) need to consider both sides of the coin. The do-it-yourself soda market is in flux. Less than a year ago we were still debating whether this so-called "fad" would wear thin, but now the biggest name in beverages, Coca-Cola, has generally settled that argument.

In other words, SodaStream's trajectory could change overnight. Here's why things could start looking up:

1. Americans want healthier options: Cue SodaStream

Free

SodaStream's "Free" is a zero-calorie seltzer beverage that it believes will resonate with health-conscious consumers. Free will appear on U.S. retail shelves in the latter half of 2014. Source: SodaStream.

America has a newfound appetite for healthier food and beverage options, and the latter is precisely where SodaStream plans to make waves. As evidence, consider that Americans are consuming fewer calories than we were four years ago, and fast-food outlets are feeling the effects of our shifting values. Meanwhile, the same developments are occurring in the beverage industry.

According to the global consulting firm Deloitte, the number one "fundamental theme" in soft drinks centers around "Changing consumer beverage preferences, featuring a shift toward health-oriented wellness drinks." SodaStream plans to pounce on this trend by doubling down on its marketing of the "health and wellness" aspects of its products. And there's reason to believe it could succeed in setting itself apart from brands like Coke and Pepsi.

For one, SodaStream's cola beverages contain no high-fructose corn syrup, a distinguishing characteristic versus Coke and Pepsi's marquee products. Secondly, SodaStream claims its colas generally have one-third the amount of sugar, calories, and carbohydrates of their rival store-bought competitors. What's more is that it has teamed up with recognizable brands in more health-oriented categories, including juice purveyors like V8, Dole, Ocean Spray, and Welch's.

Thus far, SodaStream has struggled to find a sweet spot for its U.S. marketing campaigns, but a more focused message could be just the ticket. Across the board, the health and wellness trend is picking up steam, as pointed out a few weeks ago by the natural grocer Sprouts Market: "Studies today show that the most rapidly growing segment of Americans adopting healthier eating habits is primarily middle income consumers."

If SodaStream can align its brand with this fast-growing movement, this could do wonders for its stock.

2. A rising tide of soda could lift all ships

Sodastreams Wood Source

SodaStream's Source machine. Source: SodaStream

As soon as Coca-Cola and Keurig Green Mountain debut their co-created Keurig Cold machine, many believe it will be game over for SodaStream. But Coke's entrance could have just the opposite effect. If the beverage giant catapults the at-home soda market into the spotlight through a well-financed marketing campaign, SodaStream could benefit, as well. There's room for more than one player in this industry.

First off, SodaStream is the largest participant in the U.S. home soda market; but only 1.1% of households owned a SodaStream machine as of last summer. That's almost a blip on the radar, which means there's plenty of untapped opportunity.

According to a Gallup poll in 2012, nearly half of Americans drink a glass of soda every single day. But only a fraction of those soda sippers benefit from the convenience of an at-home refill machine.

The entrance of Coca-Cola will increase awareness around the do-it-yourself soda movement. It will lead to more shelf space for these products in stores, and will likely create a "buzz" among consumers that exceeds anything SodaStream could ever muster on its own. It will prompt consumers to debate the merits of the Keurig Cold's single-serve functionality against SodaStream's higher-volume containers. And the same goes for the carbonation process, the flavors, and the cost of regular use.

Because there are limitations of Coke's machines -- including a lack of flavor customization and a single-serve refill pod -- there's reason to believe SodaStream can entice customers who find its machines better suited to their household needs.

In short, SodaStream's not doomed if the Keurig Cold is a success. With the U.S. proving to be a soft spot for SodaStream in recent quarters, this could be just what the company needs to bring attention to the overall category. As they say, a rising tide can lift all ships.

3. SodaStream looks cheap at today's price
SodaStream has fallen out of favor among a certain breed of growth-hungry investors. But with its stock price cut in half during the past twelve months -- from $70 to roughly $35 per share -- this fizzy beverage maker is starting to look cheap.

SODA Chart

SODA data by YCharts.

SodaStream's forward price to earnings stands at 18.3 today, which is roughly in-line with Coke's, at 18.6, or Pepsi's, at 18.7. SodaStream is in a very different place than either of these companies, but it is trying to go head-to-head with the beverage giants in an attempt to lure customers over to its products. That, in turn, is proving to be a costly activity that's taking a toll on earnings.

In 2013, for example, SodaStream's sales and marketing expenses totaled $186.3 million, or roughly 33% of the $562.7 million the company generated in revenue. And if you read the company's annual reports carefully, you'll realize that a sizable portion of that marketing budget is being directed toward the currently lackluster American market: "As we intend to invest in increasing our active customer installed base, particularly in the United States, we expect sales and marketing expenses to increase in absolute terms."

For value investors, this presents an interesting opportunity to evaluate. If SodaStream continues to hit a wall in the U.S., then perhaps the company could ratchet down marketing spend in this region. Should this occur, investors would be left with minimal growth in the Americas, but with a relatively attractive (and profitable) business model in the rest of the world. Revenue in Western Europe, for instance, increased by 31.4% in 2013, and this region is immensely more profitable than the U.S. for SodaStream: Western Europe generated earnings before tax (EBT) margins of 21% compared to the Americas' EBT margin of 6.2%.

For now, SodaStream's earnings are taking a hit as the company plows money into advertising and marketing to amplify growth in the U.S. But this is masking the earnings power of the rest of the company. For investors less fixated on classifying SodaStream as a "growth" stock, this could be a value opportunity with room to run.

The takeaway for investors
SodaStream is standing on firmer ground than many onlookers give it credit for. In the year ahead, the at-home soda maker could benefit from a shift toward healthier sparkling beverages, and the entrance of Coke in a currently niche DIY drink industry. Meanwhile, SodaStream's built a reliable business model overseas that's overshadowed by a stagnant American market. As soon as investors see more than a fading "growth" story in SodaStream, the sooner they can position themselves to profit.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Isaac Pino, CPA owns shares of SodaStream. The Motley Fool recommends Coca-Cola, Keurig Green Mountain, PepsiCo, and SodaStream. The Motley Fool owns shares of PepsiCo and SodaStream and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

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.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

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. It's also featured on several dozen 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 ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers