As with any Israeli company, the threat of war in the Middle East always causes investors to pause on investments in the region. Recent threats of military action in neighbor Syria only add to those fears. Possibly this is part of the reason that, despite all the positive news, SodaStream (NASDAQ:SODA) continues to trade at market low multiples, even compared to slower growing Green Mountain Coffee Roasters (NASDAQ:GMCR) and Monster Beverage (NASDAQ:MNST).
While threats of war probably won't ever go away, the market for home beverage machines has plenty of catalysts to reach its goal of $1 billion in revenue by 2016.
One big question that can't really be answered is whether being headquartered in Israel causes a stock such as SodaStream to trade at a discount. The impact from a war in Israel could be great, with nine of the company's 22 facilities located in that country. The company does operate six manufacturing plants outside of Israel, which provides some ability to continue producing products regardless of a war situation. Importantly, a large portion of SodaStream's consumables are manufactured outside of Israel, with a syrup facility in the US and CO2 filling plants mostly in safe regions. Naturally, the company's sales aren't dependent on Israel, but war would greatly hamper its ability to manufacture new soda machines. With only 38% of sales from soda maker starter kits reported for Q2, war would harm the company, but it could possibly offshore manufacturing to third parties as well.
The question of whether SodaStream trades at a discount due to the Israeli fears is apparent. Both Green Mountain and Monster Beverage trade at higher forward multiples, yet offer well-documented lower growth potential. See the below forward P/E chart:
Even more interesting, the adjusted EPS for SodaStream would place its forward multiple closer to 16.
Other success stories
If not for the threat of war in Israel, the other main fear is always that SodaStream can't compete against Pepsi or Coca-Cola. Investors argue that these megacap stocks will eventually stall growth at SodaStream via competitive pressures. That same argument didn't pan out with Green Mountain or Monster Beverage.
Green Mountain turned the stale coffee business on its head by developing a home brewing system loved by consumers. As with SodaStream, the market has long expected a larger competitor to crush Green Mountain. Because of patents and first mover advantage, the company has been able to keep competition at bay. Green Mountain now sports revenue of more than $4 billion, yet it still generates revenue growth in excess of 10%.
Monster Beverage revolutionized the energy drink market under the Monster Energy brand. Despite massive competition from other start ups and some of the behemoths in the beverage industry, it has revenue in excess of $2 billion with revenue growth of around 10%. SodaStream even competes against Monster, now that it offers energy drinks made via the carbonated soda machines.
With the success of both Monster Beverage and Green Mountain easily exceeding multi-billion revenue levels, the SodaStream target of reaching $1 billion in sales by 2016 appears less and less in doubt due to vast catalysts.
Plenty of catalysts
The roll out of the SodaCaps concept could be a major step forward in growth. This product, in a way, mimics the single-serve concept that made Green Mountain so successful and revolutionized the coffee industry. Providing consumers the ability to make single-serve sodas could be a killer product that places SodaStream further ahead of mostly non-existent competition.
The other major catalyst would be the potential for vast growth from penetrating the Americas. With a 1% household penetration rate in the US market and no sales from Mexico, SodaStream has years of growth ahead in the two largest soda markets. The company's revenue for the Americas region only reached $47 million in Q2. This could quickly become a $500 million market based solely on moving the US market penetration rate to 3%. Other regions, such as Europe and Asia, already account for more revenue, and even slow growth could quickly push those regions to $500 million in annual revenue by 2016 if not earlier. Note that the well-established Western Europe region grew revenue year-over-year by 26% during Q2.
Investors need to focus on SodaStream's long-term potential and ignore fears about a war related interruption or the competition. The past experiences of Green Mountain and Monster Beverage, low penetration rates in the lucrative Americas market, and new product innovation such as the SodaCaps should not only lead SodaStream to the $1 billion revenue mark, but also ultimately allow growth way beyond that level.
Mark Holder and Stone Fox Capital Advisors own shares of SodaStream. The Motley Fool recommends Green Mountain Coffee Roasters, Monster Beverage, and SodaStream. The Motley Fool owns shares of Monster Beverage 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.