SodaStream International (NASDAQ:SODA) has been a roller coaster ride since its initial public offering at the end of 2010, as its stock fluctuated in a range between $28.50 and $75.70 per share. Over the past several days, SodaStream has plunged from $63.70 to only $52.30 per share. The significant drop was caused by the fact that its third-quarter revenue missed Wall Street expectations. Should investors avoid the company now? Or is it a buying opportunity? Let's dig deeper.
High growth, but missing Wall Street estimates
In the third quarter, SodaStream generated around $144.6 million in sales, a year-over-year growth of 29%. However, that did not satisfy Wall Street because nine analysts expected sales around $145.2 million. This was the first time the company ever missed analysts' expectations. Its diluted earnings per share dropped from $0.80 per share last year to $0.76 per share this year. The decrease in earnings was due to higher SG&A expenses and higher income tax expense.
Although this revenue fell short of analysts' estimates, SodaStream's top line actually grew strongly. It sold around 1.2 million soda makers in the quarter, with unit growth of 27%. Consumable revenue rose by 26%, driven by increases in both gas refill unit sales and flavor unit sales. The business growth was quite good, matching the company's long-term strategy of reaching more households with its soda makers and fueling usage for a sustainable high margin revenue source.
The company will grow much more in the future due to its ongoing product innovations. The company just recently launched SodaCaps, suitable for consumers who want a simple served consistent dosing system. The company believes that SodaCaps could stimulate both incremental flavor sales and soda maker sales. For the full year, SodaStream believes that it could experience as much as 30% growth in both revenue and net income.
Much cheaper than Coca-Cola and Pepsi
On an absolute basis, SodaStream does not look so cheap at a trailing earnings valuation of 22.80. However, when growth is incorporated into the valuation, SodaStream looks undervalued. Its price-earnings-growth valuation of 0.81 is lower than much bigger peers PepsiCo (NASDAQ:PEP) and Coca-Cola (NYSE:KO). While PepsiCo is valued at 2.46 times its PEG, the PEG ratio of Coca-Cola is the highest among the three at 2.60.
Coca-Cola and PepsiCo are the two biggest global players in the carbonated soft drink market with 42% and 28.1% market share, respectively. Because of their well-established positions, the soft drink businesses of those two companies could be considered stable, but they do not offer as much growth as SodaStream.
In the third quarter, PepsiCo's beverage volume rose by 1%, driven by 4% volume growth in its international beverage business. Worldwide sparkling beverage volume for Coca-Cola increased by 1% in the third quarter. Coca-Cola remains a great global brand with 2% volume growth, which helped the company achieve 181 billion servings in the same period.
If investors prefer a stable large business with an increasing dividend stream, they might consider both PepsiCo and Coca-Cola. At current prices, while PepsiCo provides investors with a 2.70% dividend yield, the dividend yield of Coca-Cola is a bit higher at 2.80%. SodaStream has not paid any dividends at all. However, SodaStream could fit well in investors' growth portfolios with more cost-effective and healthier offerings than either PepsiCo or Coca-Cola.
Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, PepsiCo, and SodaStream. The Motley Fool owns shares of Coca-Cola, 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.