Should You Bet on the Action at SodaStream?http://www.fool.com/investing/general/2014/05/05/should-you-bet-on-the-action-at-sodastream.aspx Robert Hanley
May 5, 2014
Shares of beverage upstart SodaStream (NASDAQ: SODA) have performed generally poorly in 2014, thanks to rising costs associated with expanding the company's footprint around the world. The company's share price is still attempting to recover from a double-digit decline in January that was caused by the disclosure of a disappointing operating profit performance in the fourth quarter of 2013.
However, SodaStream's share price received a positive jolt in mid-April, due to rumors of a possible strategic investment by a larger beverage competitor, like Starbucks (NASDAQ: SBUX) or PepsiCo (NYSE: PEP). So, amid the volatility, is SodaStream a good bet for investors?
What's the value?
In its latest fiscal year, it was more of the same for SodaStream, as evidenced by a 29% sales increase that was a function of strong demand for both its machines and accessories. On the downside, though, the incremental sales required heavy promotions in order to push consumers through the purchasing process, a fact that sharply curtailed the company's gross margin. The net result for SodaStream was weaker operating cash flow, negatively impacting its ability to fund the buildout of its supply chain infrastructure around the world.
The beverage giants smell profits
The growth opportunities in the region would also explain why the U.S. beverage giants might be interested, given their almost certain desire to get a piece of the at-home beverage pie.
While Starbucks' core coffee business continues to hum along, with solid comparable-store sales gains across its geographies, the company increasingly has had to look beyond its trademark product in order to support its heady market valuation, including the reported addition of made-to-order sodas to its store product lineup in 2014. The company's modus operandi for gaining critical mass in non-core areas has been to buy rather than build, as highlighted by its recent acquisitions of Teavana and La Boulange in the tea and baked goods categories, respectively.
SodaStream would certainly be a much larger nugget for Starbucks to swallow, but it would be easily doable for a company that generated more than $1.7 billion in adjusted free cash flow in its latest fiscal year.
PepsiCo, in contrast, has been struggling to find growth in its beverage business, especially in the North American market, where consumers have anecdotally been souring on sugary carbonat