A disruptive company
Sodastream International Ltd (NASDAQ:SODA) is trying to change the way we consume sodas via its innovative home beverage carbonation systems. This is no easy task at all, and the company is competing against much bigger players like Coke and Pepsi, but SodaStream has many advantages over traditional soft drinks companies.
SodaStream offers a convenient alternative for those who don´t want to carry and store many bottles of soda. This is not only about personal comfort, bottles and cans produce considerable environmental damage, and Sodastream International Ltd (NASDAQ:SODA) has been promoting the environmental benefits of its products in its marketing campaigns, targeting the environmental conscience of consumers around the world seems to be the way to go these days.
Besides, SodaStream offers much lower costs and more flexibility when it comes to flavors and calories than traditional soda alternatives. The company has been quite provocative in its marketing campaigns versus Coke and Pepsi, this has generated some controversy – including banned ads in the US and in the UK – but things have turned out quite well for SodaStream, since those banned ads produced a lot of buzz about Sodastream International Ltd (NASDAQ:SODA) as a challenger to those giant corporations.
Consumers have been embracing the product and generating big profits for SodaStream, both sales and earnings have been growing rapidly over the last years.
The company operates under the razor and blade mode, it sells the machines – the razors – for a low cost and it makes most of its profitability with the consumables – the blades. The fact that customers are effectively using the machines and buying consumables is also quite reassuring when it comes to measuring the company’s financial prospects and acceptance among customers.
Source: SodaStream investor day presentation
Even if the company has been doing amazingly well over the last years, we are barely seeing the tip of the iceberg when it comes to long-term potential. Management estimates that the company owns a market share of only 0.2% in the global carbonated soft drinks market, and it plans to reach sales above $1 billion per year by 2016. This is a big increase versus $436 million in 2012, but it sounds quite reasonable considering recent performance.
The case for an acquisition
Coke and Pepsi have many things that Sodastream International Ltd (NASDAQ:SODA) doesn´t: abundant financial resources, a gigantic global distribution network and enormously valuable brand recognition. On the other hand, they don´t own the same innovative and disruptive product that SodaStream brings to the market.
To put things in perspective, SodaStream spends in marketing in one year what The Coca-Cola Company (NYSE:KO) spends in only two days, yet the innovator has been outgrowing the cola giant by a wide margin. Just imagine what SodaStream could achieve if it had the money, the commercial scale and the branding power of a giant like Coke or Pepsi behind its disruptive products.
If Coke or Pepsi were to acquire Sodastream International Ltd (NASDAQ:SODA) and power its products on a global scale, they would probably have to face some product cannibalization. But like Steve Jobs said, “If you don‘t cannibalize yourself, someone else will.”
Buying SodaStream while it´s still young and affordable would not only provide interesting growth opportunities for the soda giants, it would also mean eliminating a potentially threatening competitor on a long term basis.
In terms of valuation, and even considering that an acquisition would probably mean a considerable premium over market price, SodaStream doesn´t look too expensive at all. The company has a considerable higher P/E and forward P/E ratio than Coke or Pepsi, but when including growth into the equation, the numbers look much better.
Since Sodastream International Ltd (NASDAQ:SODA) has an average expected growth rate of 24.6% annually for the next five years, this means that the PEG ratio – P/E divided by expected growth – is significantly cheaper than in the case of Coke and Pepsi.
An innovative high growth company for a fair price, this sounds like a pretty good deal, especially when seen with the eyes of companies like Coke or Pepsi which could face growing competition from SodaStream in the middle term.
Bottom line
The rumors about Pepsi is trying to buy SodaStream may be completely untrue. However, considering that the company has a compelling and innovative proposition for customers, and that it has been performing exceedingly well over the last years, both Coke and Pepsi have strong reasons to consider an acquisition before Sodastream International Ltd (NASDAQ:SODA) becomes not only a much more expensive company, but even also a competitive threat for these giants.
Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends The Coca-Cola Company (NYSE:KO), PepsiCo, Inc. (NYSE:PEP), and SodaStream. The Motley Fool owns shares of PepsiCo and SodaStream.
The article SodaStream Is a Great Candidate for an Acquisition originally appeared on Fool.com.
Andrés is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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