The market is no longer in denial
Last summer, I made the bold statement that “the market was in denial” with respect to Sodastream International Ltd (NASDAQ:SODA) and its growth opportunities. More recently, the market has finally started to catch on; this week, Barclays analyst David Kaplan took a look at the growth trajectory of SodaStream and raised his price target from $55 to $100. This massive upgrade and Kaplan’s well constructed bullish arguments for 2013 and 2014 propelled the stock 8% higher to a new 52-week high.
While I’d argue that nothing has really changed in the investment thesis over the past month, the market is finally starting to take notice of Sodastream International Ltd (NASDAQ:SODA)’s tremendous potential. In particular, management’s projection that the company will more than double its revenue and reach $1 billion by 2016 has seemed to provide investors with a better definition of the growth opportunity that has existed for years.
Is the stock still a buy?
The recent series of analyst upgrades and corresponding share price gains have certainly shown the market’s evolving understanding of SodaStream’s investment thesis. As usual, the big question on everyone’s mind after a run like SodaStream has had is: is the stock still a buy? To begin this conversation, here’s a look at the trend of a few of Sodastream International Ltd (NASDAQ:SODA)’s valuation metrics that this series of articles has tracked:
| CAPS rating (out of 5 stars) | 2 stars | 2 stars | 3 stars | 3 stars |
| Share price | $39.00 | $49.10 | $58.79 | $70.35 |
| Market capitalization (in millions) | $791 | $1,000 | $1,218 | $1,431 |
| TTM revenues (in millions) | $345 | $436 | $466 | $466 |
| TTM price to sales ratio | 2.28 | 2.29 | 2.61 | 3.06 |
| TTM operating margin | 10.4% | 10.1% | 10.2% | 10.2% |
| TTM price to earnings ratio | 23.74 | 22.80 | 26.58 | 32.27 |
| Forward price to earnings ratio | 13.88 | 18.81 | 18.37 | 21.85 |
| PEG ratio (per Yahoo! Finance) | 0.79 | 0.75 | 0.90 | 1.12 |
| Cash on balance sheet (in millions) | $57 | $63 | $50 | $50 |
| Debt on balance sheet (in millions) | $0 | $0 | $8 | $8 |
While SodaStream shares may not be the screaming buy that they were last August, it is hard to argue that a company with a forward P/E of 22 and a PEG of 1.1 is overvalued, especially a company with Sodastream International Ltd (NASDAQ:SODA)’s long-term growth potential.
Growth prospects remain strong
Analysts project that SodaStream will grow earnings by 25% per year over the next five years (source: Yahoo! Finance), which corresponds to the top line growth rates required to reach $1 billion in revenue by 2016. As discussed in more detail in the previous article in this series, this growth is expected to come from a variety of sources, including increased penetration in the United States, expansion in emerging markets, new innovations in soda makers and unique products like SodaCaps, and through the creation of new partnerships. These growth pillars are central to the investment thesis and remain unchanged.
Risks to be considered
It is easy to not spend much time considering risks when analyzing a company as undervalued as SodaStream was a year ago. However, now that Sodastream International Ltd (NASDAQ:SODA)’s share price has begun to catch up with the true value of the business, the margin of safety for investors increasingly depends on an assessment of the risks facing the company’s ongoing growth.
