SodaStream: Is the Market on Crazy Pills?

OK, class, today we're going to have a quiz:

A company that's trading at a forward P/E of about 35 subsequently reports the following results for the quarter:

  • Revenue up 38%, ahead of analyst expectations.
  • An adjusted earnings increase of 161%, with EPS also coming in ahead of expectations.
  • And record sales volume.
  • The company then reaffirms guidance of revenue growth of 30% and earnings growth of 60% for the full year.

What, class, will happen to the share price? Soar 10%? 30%? 50%? Maybe stay flat since full-year guidance didn't change?

Nope: The correct answer, class, is plummet by 33.8%.

That is, of course, if the market's reaction to SodaStream's (Nasdaq: SODA  ) second-quarter earnings yesterday is any indication.

What? Huh? Is this thing on?
If you're a bit stunned by the market reaction, join the club.

The market's apparent beef with SodaStream is that despite its phenomenal growth in the first half, the company kept its guidance the same for the full year.

The implication is that management must be expecting growth to decelerate for the second half of the year, if full year guidance is to remain constant.

While this intuition is factually true, reacting as the market did is illogical.

Think about it: If SodaStream had simply met expectations -- meaning if the company had actually done worse -- then no one would have been upset when it did not raise full-year guidance. There would have been nothing to be disappointed by and no reason to sell.

But because the company did so much better than expected, the company stock price is punished for not promising even more. This makes no sense.

Management's response
The only justification I can think of is that by not raising guidance for the second half (and for the year), it shows that management thinks sales growth -- and demand for do-it-yourself soda -- will decelerate from here.

Alas, this doesn't fit the facts. And management did a great job of explaining why on the conference call.

Sales for the second half of the year are still expected to be above that of the first half. This is highly unusual for SodaStream's business. In its more-developed markets the company sells more in the first half than in second half, management says. The revenue split is just moving back to where it normally is . This is why decelerating sales growth in the second half doesn't portend lack of demand.

Second-half sales were also unusually high last year (making second-half 2011 sales growth projections seem weak in comparison) because of the invention's introduction to Bed Bath and Beyond (Nasdaq: BBBY  ) in the fourth quarter of last year. It was a major boon for the company but skewed its results much higher to the second half last year.

Expanding and entering the restaurant market
The company is also expanding at a surprising pace. In July, it began selling machines in 700 Best Buy (NYSE: BBY  ) stores and is currently test marketing in a small amount of Costco (Nasdaq: COST  ) stores. The limited amount of products Costco carries is proving to be a challenge, however, so don't be surprised if you don't see a greater rollout there.

SodaStream also announced on the call -- and I have yet to see this reported anywhere else -- that it is entering the restaurant market.

No -- before you sell your shares out of fear -- it is not going to compete directly with PepsiCo (NYSE: PEP  ) and Coca-Cola (NYSE: KO  ) in fountain soda. Rather SodaStream is going to provide restaurants with a system for carbonating water for use in carafes that would replace fancy-dancy European sparkling water. They did not give much more detail than that.

Stay the course
All in all, I think aggressive growth investors will want to stay the course. The stock is the cheapest it has been in a long time, and the all-important growth in higher-margin consumables (syrups and CO2) -- 203% in the United States -- shows that SodaStream's "razor and razorblade" business model is still in place.

Fool contributor Chris Baines is a value investor who loves soda. Follow him on Twitter @askchrisbainesChris's stock picks and pans have outperformed 85% of players on CAPS. Chris owns no shares of the companies mentioned. The Motley Fool owns shares of Best Buy, PepsiCo, Costco Wholesale, and Coca-Cola. Motley Fool newsletter services have recommended buying shares of Costco Wholesale, PepsiCo, Bed Bath & Beyond, SodaStream International, Best Buy, and Coca-Cola, as well as creating a diagonal call position in PepsiCo. 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.


Read/Post Comments (8) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 12, 2011, at 2:23 PM, chadscards1274 wrote:

    Couldn't agree more with the article. I expected the stock to drop even with a beat because there are a lot of shorts in SODA, but a 33% drop was astounding.

  • Report this Comment On August 12, 2011, at 2:29 PM, TheDumbMoney wrote:

    This article pretty much exactly sums up (though far more eloquently and comprehensively than I did) why I bought SODA shares for the first time yesterday.

    http://caps.fool.com/Blogs/oh-f-it-all-soda-at/627560

  • Report this Comment On August 12, 2011, at 2:37 PM, jimmy4040 wrote:

    It's a great stock, not a great company. I was consistently wrong about the stock price, but in this economy a forward PE of 35 for a gadget company with only one product is astoundingly good. The too, inevitably their costs will rise because Israeli inflation is running so hot that Netanyahu's approval rate has plummeted to 32%.

    You made a winning bet on the roulette wheel for a long period of time. Doesn't make sense to complain about the one time you lost. Besides if you have been paying attention almost all RB picks have taken similar hits this year. I would guess a loosely organized shorting campaign is partly responsible.

  • Report this Comment On August 12, 2011, at 2:46 PM, jimmy4040 wrote:

    A good review of the pros and cons.

    This is the line that stands out to me:

    "The Israeli producer of homemade soda machines posted a record decline in New York yesterday after the company that trades at four times average valuations on the Nasdaq Stock Market disappointed investors by not raising its 2011 earnings outlook"

    Four times.

    http://www.bloomberg.com/news/2011-08-11/sodastream-right-fo...

  • Report this Comment On August 12, 2011, at 3:02 PM, TheDumbMoney wrote:

    jimmy, with all due respect, you have a real habit of comparing apples to oranges.

    You have done this many times with MSFT posts, calling it dead money just because of what the stock price has done, regardless of the growth. Here, who cares about "4 times average valuations" if it is growing 4 times as quickly?

    Jimmy, for the dozenteenth time: a company's present valuation should be compared to its own historical and expected growth. Period.

    It should not be compared to its former market-appraised valuation (as you do with MSFT), and nor should it be compared to the valuation of totally different companies, and without even examining their relative growth rates (as you do above here).

    Enjoy your weekend.

  • Report this Comment On August 13, 2011, at 4:24 PM, jimmy4040 wrote:

    dumb:

    Well ok, but I have made money trading MSFT back and forth while long time holders have made little. I bought some SODA for a trade for the first time.

    I'm happy with mine. I hope you are with yours.

  • Report this Comment On August 13, 2011, at 4:44 PM, TheDumbMoney wrote:

    Great, make money trading the range on MSFT. I have held since 2009 at around $18, made decent money, and unlike you paid no taxes or commissions to anybody.

    I'm just saying, if you drink the coolaid that it's dead just because it hasn't moved, eventually earnings will go up enough that the multiple will really shift on you and cause some problems if you are short or actually want to hold longterm.

    If your focus is trading, a better statement about MSFT is that no "catalyst" exists to change the multiple at which it trades and override the pessimism of the market, which causes its stock to trade at ever lower P/Es even as its earnings continue to beat market-average earnings year after year after year after year after year....

    Best of fortune.

  • Report this Comment On August 14, 2011, at 10:30 AM, jimmy4040 wrote:

    I don't know why we're talking about MSFT, but since we are here's the scoop. If you go to the boards, you will see that I "jumped in" a little below 24, which t wrote at the time. I also said that I was out at 26, in that post.. I did in fact follow my discipline and get out above 26.

    So in about 45 days simply following the normal MSFT trading range, i made more money than the people who have held it for the last 5-10 years. If it drops back to 24, I'll go again, until Ballmer leaves.

    A few years back I saw John Bogle on tv talking about the theory behind buying companies "on sale". He said that all it usually means is that you get a bigger piece of a declining company, because there's usualy a reason when your company goes on sale. Now he was speaking about an individual company, not a 2008 market when everything in the world falls of course.

    I have lived by that and never rushed in to a company under those circumstances except as a trade. As Cisco proved, one shock will often be followed by others to make your "sale" look expesnive.

    Anyway I enjoyed the theoretical discussion and wish you the best.

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