SodaStream (NASDAQ:SODA) has delivered uninspiring returns lately, as the stock has fallen by more than 25% in the last six months. Compared to bigger soft drinks companies like Coca-Cola (NYSE:KO), PepsiCo (NASDAQ:PEP) and Monster Beverage (NASDAQ:MNST), the company looks attractively valued, especially considering its superior growth potential. Will SodaStream outperform?
By the numbers
SodaStream is not easily or directly comparable to soda giants Coca-Cola and PepsiCo. Both Coke and Pepsi own several billion-dollar brands, enormous distribution networks and far more financial resources than SodaStream. Coca-Cola and Pepsi are two rock solid dividend players that have proven their strength by consistently increasing dividends though the decades, which makes them far safer and more predictable than SodaStream.
On the other hand, SodaStream beats them without discussion when it comes to growth rates. Coke and Pepsi are facing stagnant demand in developed countries due to market saturation and the trend toward healthier nutritional habits, while SodaStream is still in its initial growth stages. Even when compared against Monster, which has been a primary beneficiary from the energy drinks boom, SodaStream is still the company with superior growth in the group.
Keeping this in mind, it´s important to note that SodaStream looks particularly cheap if we incorporate growth forecasts into valuation ratios.
Comparing ratios like P/E or forward P/E for SodaStream against the other soft drinks companies in the table, the company is valued in line with Coke and Pepsi, but cheaper than Monster.
On the other hand, SodaStream is materially undervalued when looking at PEG ratios. Even conceding that SodaStream could deserve a lower PEG than bigger and more established companies due to its higher risk, the valuation gap leaves plenty of potential for gains from current levels.
If the company can in fact deliver growth rates in the area of 27.2% per year over the coming five years like Wall Street analysts are forecasting on average, then investors in SodaStream could receive substantial gains from a long position in the company.
On uncertainty and opportunity
SodaStream delivered lower than expected sales for the last quarter, and that´s probably one of the biggest reasons for the negativity surrounding the stock.
Sales during the quarter grew by 29% versus the same quarter in the previous year to $144.6 million, barely below analysts' forecast of $145.2 million.
Earnings per share, on the other hand, were better than expected at $0.76 per share versus $0.72 forecasted by Wall Street analysts on average. Adjusted EBITDA grew by 23.8% to $24.8 million, so profitability doesn´t seem to be a problem for the company.
Guidance for the rest of the year was also strong; management expects a 30% increase in revenue for 2013 versus 2012, and adjusted net income, which excludes share-based compensation expense, is expected to grow around 30% too.
Machine sales were quite healthy with a 27% increase in the quarter, and carbonators were even better with a 34% growth rate. This indicates that consumers are not only buying the machines, but also putting them to active use, which is a positive sign in terms of demand health.
Flavors, on the other hand, were surprisingly weak, with an increase of only 7% during the quarter. Management was quite explicit in blaming vendor inventory reductions for the weak flavor sales, especially in the U.S. CEO Daniel Birnbaum said during the press conference:
"To be clear, these were vendorwide inventory reductions not restricted to SodaStream."
Considering that both machines and carbonators sales were pretty strong during the quarter, either management is right in signaling inventory problems as the cause for disappointing carbonator sales, or consumers are moving away from flavored sodas and choosing carbonated waters instead.
It may be a combination of both factors, but it still makes sense to assume that flavor sales could have a decent rebound from currently depressed levels if machines and carbonators continue performing strongly in the future.
In that case, SodaStream could deliver substantial returns considering its attractive valuation when factoring in its superior growth potential.
SodaStream looks materially undervalued considering its potential for growth, especially if flavor sales rebound in the coming quarters. Being a small player in a sector dominated by giants like Coke and Pepsi, the stock is a risky proposition. However, upside potential could justify the risk for opportunistic long term investors who can handle the short term uncertainty.
Andrés Cardenal owns shares of SodaStream. The Motley Fool recommends Coca-Cola, Monster Beverage, PepsiCo, and SodaStream. The Motley Fool owns shares of Coca-Cola, Monster Beverage, 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.