SodaStream International Ltd (NASDAQ:SODA) has done it again. By “it,” I mean beat analysts expectations, raise guidance for the remainder of the year, and continue to strengthen its position as a disruptor in the largely complacent carbonated beverage industry. So much for Oppenheimer’s recent downgrade citing valuation concerns and a “choppy” second quarter. This article will take a look at how recent developments have impacted the long-term investment thesis for SodaStream.
Growth rates remain impressive
Perhaps more important than the 29% worldwide growth and 42% U.S. growth is the fact that revenues continue to grow strongly both in the sale of soda makers and the sale of consumables (syrups and gas refills). In fact, growth in the sale of consumables worldwide (+28%) outpaced growth in sales of new soda makers (+25%); this continues to be a strong indicator that the product is truly being embraced by consumers and used repeatedly. As I’ve written a number of times, the sale of consumables in Sodastream International Ltd (NASDAQ:SODA)’s “razor and blade” business model is critical to long term success.
On the bottom-line, diluted earnings per share grew even more impressively, increasing 33% over last year. For the second quarter in a row, this strength on both the top and bottom-lines has caused management to raise its full-year guidance. Currently, management is forecasting revenue growth of 30% and net income growth of 23% over last year.
Management expects to double sales in three years
As previously highlighted in a well-constructed analysis by Motley Fool analyst Steve Symington, management expects to reach $1 billion in sales by 2016; in the most recent earnings call, management reiterated this target and even made a point to say “I don’t think 2016 is an aggressive target. I think it’s a very doable target. There’s a lot of upside beyond that just in the markets that we are in right now.” To achieve this $1 billion target, Sodastream International Ltd (NASDAQ:SODA) will need growth from a number of areas:
- Partnerships – Sodastream International Ltd (NASDAQ:SODA) has partnered with companies ranging from home appliance makers Samsung and Whirpool’s KitchenAid to beverage makers including Kraft Foods Group Inc (NASDAQ:KRFT) and Ocean Spray. While some of these partnerships have just started to be rolled out, Ocean Spray syrups are not set to debut until Q4 and KitchenAid products aren’t expected until 2014. Expect more partnership announcements to follow in the coming months.
- U.S. retail expansion – While Sodastream International Ltd (NASDAQ:SODA) has reached 16,000 doors in the United States, there is still room for growth. In just the past quarter, SodaStream expanded its gas refill network to include all Best Buy Co., Inc. (NYSE:BBY) stores. Additionally, 400 The Kroger Co. (NYSE:KR) locations are now selling SodaStream products and a home shopping presence on QVC during the past quarter. While many of the largest retailers already sell SodaStream products, there is plenty of opportunity to expand existing relationships and create new ones.
- Increased adoption – Despite all of the analyst fears that Sodastream International Ltd (NASDAQ:SODA) is running out of room to grow, it is important to note that the company has just 1% penetration in the United States. This illustrates just how huge the remaining opportunity is in the United States; even reaching penetration levels of just 5% would translate into huge growth for the company.Internationally, just 13% of the company’s revenues come from its “Asia-Pacific” and “Central & Eastern Europe, Middle East, Africa” geographic segments; accordingly, there is plenty of opportunity to expand once the growth in the United States trails off (which is not likely anytime soon). For example, Sodastream International Ltd (NASDAQ:SODA) is planning its first meaningful entry into India during 2014. Interestingly, management explicitly stated that the $1 billion revenue target does not rely on new markets such as India.
- Innovation – Sodastream International Ltd (NASDAQ:SODA) has consistently demonstrated a desire to innovate to make the home soda making experience even better. This was evident with the Revolution, which was named the home appliance product of the year by the Consumer Survey of Product Innovation.As an avid user of Sodastream International Ltd (NASDAQ:SODA) products, I’ve personally experienced two potential areas for improvement. First, adding syrup by pouring it from one bottle to another could be imprecise and create a mess if a user isn’t careful. The answer to this is the upcoming release of SodaCaps, a patented single serve syrup dispensing system. Second, the bottles used by SodaStream have to withstand the pressure of the carbonation process and preserve the carbonation for longer than the standard plastic bottle; to accomplish this, these heavy duty bottles have not been dishwasher safe. This is a mild inconvenience for those of us (myself included) that don’t like having to wash anything by hand. This problem too was solved this quarter, with the under-the-radar release of dishwasher safe bottles.
| Jun 4, 2013 | Jul 14, 2013 | Aug 6, 2013 | |
|---|---|---|---|
| CAPS rating (out of 5 stars) | 3 stars | 3 stars | 3 stars |
| Share price | $70.35 | $59.51 | $65.09 |
| Market capitalization (in millions) | $1,431 | $1,233 | $1,350 |
| TTM revenues (in millions) | $466 | $466 | $496 |
| TTM price to sales ratio | 3.06 | 2.77 | 2.73 |
| TTM operating margin | 10.20% | 10.20% | 10.48% |
| TTM price to earnings ratio | 32.27 | 27.30 | 28.06 |
| Forward price to earnings ratio | 21.85 | 18.25 | 19.61 |
| PEG ratio (per Yahoo! Finance) | 1.12 | 0.89 | 0.94 |
Many investors use PEG ratio as an indicator of whether a stock is fairly valued based on its growth prospects. A PEG of 1.0 is often used as a benchmark; ratios above this amount may indicate (among other things) that the stock is expensive or that the rest of the market is expecting growth rates that are higher than published analyst forecasts. Rates below this often indicate an underpriced stock. Thanks to a combination of improved Q2 results and the recent pullback from $70 to $65 per share, Sodastream International Ltd (NASDAQ:SODA)’s PEG is once again below 1.0; based on this metric, it is hard to argue that shares of SodaStream are overpriced today given its recent results and the future growth potential discussed below.
A simplified valuation exercise
In addition to management’s guidance of $1 billion in revenue, management indicated that it expects net income margins between 15% and 18% by 2016. Here is how these targets can be modeled out to forecast a share price by the end of 2016:
| 15% Net Income Margin | 18% Net Income Margin | |
|---|---|---|
| Assumptions | ||
| Net Income (in millions) | $150 | $180 |
| Shares outstanding (in millions)* | 23.0 | 23.0 |
| Market capitalization (in millions) | ||
| P/E of 20 (conservative assumption) | $3,000 | $3,600 |
| P/E of 28 (current TTM P/E) | $4,200 | $5,040 |
| Share price | ||
| P/E of 20 | $130.43 | $156.52 |
| Percentage increase | 100% | 141% |
| P/E of 28 | $182.61 | $219.13 |
| Percentage increase | 181% | 237% |
* Shares outstanding assumes current diluted share outstanding count of 21.4 million is diluted reasonably over the next three years to 23.0 million diluted shares.
Using a P/E of 20, this guidance translates into a share price target of $130 – $157. I consider a P/E of 20 to be pretty conservative given the growth trajectory of the company, management’s statements supporting strong growth beyond 2016, and the company’s lack of substantial debt. So, the “worst case” in this conservative estimate is that the stock will double by the end of 2016.
Using a P/E of 28, the current P/E the stock is trading at, this guidance translates into a share price target between $183 and $219. This guidance projects a share price increase of 237% in three years and still makes no effort to be aggressive.
While this model is highly simplified, hopefully it achieves the desired goal of emphasizing just how big the opportunity is for investors in Sodastream International Ltd (NASDAQ:SODA).
A word of caution
Like each article in this series, the arguments thus far have been mostly bullish. While this reflects the fact that SodaStream is among my highest conviction picks, it is important to remain cognizant of the risks inherent in any investment.
For Sodastream International Ltd (NASDAQ:SODA), the risk is (and will likely continue to be) the potential emergence of competition. While large beverage makers like The Coca-Cola Company (NYSE:KO) have remained on the sidelines to date, competition has begun to creep into the market from kitchen appliance manufacturers such as Cuisinart.
