By Phil Lassiter
SodaStream International Ltd. (NASDAQ:SODA), a small Israeli company that produces affordable countertop home-based soda machines, continues its impressive run, up almost 80% over the last six months. Making soda with SodaStream is a simple process, pour water in the one-liter bottle, add the syrup, inject the gas, give it a light shake to distribute the syrup, and drink. To make measuring simpler the company developed what they call “soda caps,” which are single use pre-measured caps that the user places on the mouth of the carbonated water bottle then presses down delivering the pre-measured syrup into the bubbling water.
So the question is what’s so good about making your own sodas, and why are people buying the product? For one variety, SodaStream has offers over 150 different flavor options including the old staples like colas, lemon-lime, and root beer along with syrups produced by Kraft Foods Group Inc.(NASDAQ:KRFT) and the Campbell Soup Company (NYSE:CPB) including Crystal Light, Country Time Lemonade, and Kool-Aid brand, and V8 Splash and V8 V-Fusion drinks. Secondly, there is a convenience of not having to carry big soda bottles and cans from the grocer. Thirdly, since the bottles are reusable there is an environmental advantage by not wasting all those plastic bottles and cans. And the fourth reason is cost – a 12 oz. glass of soda runs roughly $.25, though not astronomical in savings, it is still less expensive than purchasing store bought soda, and over time the savings do add up.
But as an investor, has SodaStream peaked in price? The company is valuation has shot up to $1.5 billion and has a pricy P/E of 33.33.44, but SodaStream is an aggressive young company with a unique product in an soda industry that is expected see sales grow to almost $310 billion in 2015. The popularity of SodaStream has created a buzz for a possible buyout at a premium price by one of the major bottlers. Earlier this month the company’s stock skyrocketed over 30% in premarket trading when rumors that PepsiCo Inc. (NYSE:PEP) made an unsolicited offer acquire SodaStream in a $2 billion buyout. However, Pepsico quickly squashed those rumors and the stock came back down to earth. But there may be some truth to those rumors, as the big bottlers such as The Coca-Cola Company (NYSE:KO) and Pepsico saw less than stellar numbers in the first quarter while SodaStream saw revenues increase 33.9%. And though 38% of Pepsi’s revenues come from the sale of concentrates to businesses like restaurants and convenience stores, there is still an enormous home based clientele for soda, and SodaStream continue to gain momentum in the home soda market as the product is in an estimated 5 million households worldwide and growing as it sells close to 10,000 machines per day. SodaStream is in 60,000 stores in 45 counties, and is expected to expand into new markets in the highly populated countries of China and India. It is not a stretch for a major bottler to actively consider buying the small upstart to gain the home based soda drinker who wants to make their own product.
Though it may seem Coke or Pepsi might be the perfect match for SodaStream, and both companies are sitting on billions of dollars of cash to invest, purchasing SodaStream would pretty much announce to the world that Coke or Pepsi see the home countertop soda machine as a threat to their current way of selling their product to home consumers. What would be a better fit would be a company like Kraft or Campbell’s that are not seen as just a beverage company and already have licensing agreements with SodaStream. Kraft appears to be the better bet with its major retail distribution network in supermarkets and drugstores where SodaStream has a small presence. Kraft also owns Capri Sun, Tang, and Kool-Aid which could the company could use to continue to expand the SodaStream products. However the biggest drawback to a buyout may well be the $1.5 billion value on the company, which is quite a premium for a company and has had its high valuation be the topic of a number of articles over the past year. However, with the distribution power of a major food manufacturer such as Kraft, if SodaStream can continue to gain more distribution avenues today’s valuation of the company may still make it a bargain.
Even if there is no buyout the company continues to grow at a rather fast pace, as it is expecting revenue for fiscal 2013 to increase approximately 25% over fiscal 2012 which had revenues of $436.3 million. SodaStream also sees 2013 adjusted EBITDA to increase approximately 36% over fiscal 2012 adjusted EBITDA of $61.1 million and net income on an adjusted basis, which excludes share-based compensation expense, to increase approximately 27% over the adjusted net income of $50.0 million reported in fiscal 2012. The company expects fiscal 2013 net income to increase approximately 20% as compared with net income of $43.9 million in fiscal 2012.
On June 10th analysts at Citigroup raised its price target for SodaStream to $82 per share. Earlier in the month Dougherty & Co reiterated a “hold” rating with an $80.00 price target on the stock. However, analysts at JPMorgan Chase reiterated a “hold” with a target price of $70.00.
Whether SodaStream becomes an actual target of a buyout out by a major bottler or food manufacturer there is little doubt that the business model for the company has proven to be successful as this is a profitable company and as stated earlier there are over 5 million households worldwide with a SodaStream machine and sales continue to grow. And while there are concerns about the high valuation there is little question of the company’s growth. The stock has pulled back from its June 10th high of $77.80 to close on Friday June 14th to $72.82. I don’t think the stock has lost momentum but I do think profit taking seems to have made the stock a bit more attractive. If the stock drops below $70 per share it would make it an attractive buy.