After two days of losses, stocks turned things around this afternoon, with the S&P 500 (SNPINDEX:^GSPC), and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES:^DJI) finishing up 0.85% and 0.53%, respectively.
SodaStream: Not just empty calories
This morning, PepsiCo (NASDAQ:PEP) categorically denied that it is in talks to buy Israeli SodaStream International (NASDAQ:SODA), but shares of the Israeli company, which sells home soda makers, still managed to add nearly 3%. The stock was up nearly 10% intraday on a curiously detailed report in an Israeli financial newspaper, the Calcalist, according to which, PepsiCo had made a $2 billion offer for the company through Goldman Sachs, and might be willing to pay up to $95 per share.
As rich-nation consumers become increasingly environmentally conscious, SodaStream's solution to providing carbonated soft drinks gains appeal. The company has grown revenues at an annualized rate of 48% over the past three years, and it earns mid- to high-teen returns on equity. Is SodaStream an attractive acquisition target for PepsiCo or it rival, Dow component Coca-Cola (NYSE:KO)?
SodaStream's model is clearly disruptive, so an acquisition -- which both companies could easily afford -- would allow them to control the threat. The trouble with an independent SodaStream is that, assuming the product is excellent (I've not tasted it personally), it has the potential to produce an "emperor has no clothes" moment for consumers who taste it and decide that they're no longer willing to pay up for many branded soft drinks.
As a stand-alone business, is SodaStream an attractive investment? Investment bank Barclays produced a report today, according to which the company has well-protected barriers to entry, but I can't think what they might be, offhand. I doubt that the syrups or the soda machines themselves are difficult to manufacture. Perhaps they are referring to the brand, or the company's "installed user base." Either way, as far as growth stocks go, I think SodaStream is intriguing: it's profitable, has a clean balance sheet, and is growing fast. Better yet, at 24.1 times next 12 months' earnings-per-share estimate, the stock doesn't sport the kind of valuation that is impossible to overcome.
Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool recommends Coca-Cola, PepsiCo, and SodaStream. The Motley Fool owns shares of PepsiCo and SodaStream. 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.