SodaStream Just Raised the Bar... Again!

Offering earnings guidance above analyst expectations is obviously a bullish sign, as over time earnings growth follows sales growth. And when a company predicts greater sales or profits, we expect its stock price to soon follow.

Last week DIY soda jerk SodaStream International (SODA) said it believes full-year revenue will grow 46% over 2011 and profits will rise 59%, much better than the 40% and 55% growth, respectively, it previously guided to. Now don't go blindly buying on its bullish report -- you still need to do some research. Use the announcement as a jumping-off point for additional research instead.

SodaStream International snapshot

Source: Finviz.com. TTM = trailing 12 months. N/A = not applicable; SodaStream doesn't pay a dividend.

Fizz from its pop
This is the fourth straight quarter this year that SodaStream has raised guidance over its previous expectations. Yet despite that achievement, the stock is up only 10% year to date compared to a 9% rise in the S&P 500. When you're essentially just keeping pace with what the broad market is achieving even as you're constantly raising the bar, there's something more at play here.

From starter kits to consumables like CO2 and flavorings, SodaStream has found traction this year, generally recording growing sales in each area. Last year there was some concern that growth was slowing, but that hasn't been borne out by reality, as broader distribution agreements with Wal-Mart (WMT 1.32%) and flavor deals with Kraft Foods (KRFT.DL) and now Campbell Soup (CPB 1.29%) have boosted sales.

Aside from criticism that it's little more than a fad brought on by the health-foods movement, it seems most investors fear it will blow up like Green Mountain Coffee Roasters. Where the coffee maker had some strong patents that protected its position for some time, once they expired there was little moat.

A shallow moat
Unfortunately, SodaStream doesn't even have that. It admits its patent portfolio is limited and what little protection it has will be expiring soon (though it doesn't provide any timeline). It's tried to ward off that cliff by introducing some design protection (i.e., "SodaCaps" flavor capsules; a new designer machine; "Snap-n-Lock" connecting mechanisms; and LED displays), but these are hardly moat-building advances.

Thus far, DIY competitors are few and far between, limited to much smaller and weaker competitors like Primo Water (PRMW). The real battle is against the established players like Coca-Cola (KO 1.50%) PepsiCo (PEP 3.62%), and Monster Beverage (MNST 1.12%).

As an Israeli company it also suffers from fears of the euro-crisis weighing on operations, and though the U.S. may ultimately prove to be its biggest market, Western Europe accounts for just under half of its sales (down from 51% last quarter and 55% a year ago).

Going flat
While I've been cured of my notion that SodaStream is a fad, its position as a niche market leader suggests that there are constraints as to how much it can grow. The heavily shorted stock could get a bounce if shorts are forced to cover, but that's hardly a reason for a long-term investment. Let me know in the comments box below if you think the soda jerk will make a jerk out of me for doubting its potential.