Sodastream International Ltd (NASDAQ:SODA) exploded 15% last week after the company crushed earnings expectations and increased its guidance for the rest of the year. But, even after this move higher, the stock is trading at reasonable valuation levels considering its growth opportunities. As long as the company continues to deliver solid performance, there is still plenty of upside potential for investors.
Sparkling performance
Sodastream International Ltd (NASDAQ:SODA) is trying to revolutionize the carbonated drinks industry by allowing consumers to make their own carbonated beverages at home with a variety of different flavors. This provides many advantages over traditional soda consumption: more flexibility, lower costs, better environmental implications, and much healthier choices.
Both The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) are facing slowing or even declining volume sales in the all-important U.S. carbonated drinks market, so these companies are trying to make up for this slowdown via international expansion and product innovation.
The Coca-Cola Company (NYSE:KO) delivered volume growth of 10% in Eurasia and Africa during 2012, while the Pacific region and Latin America experienced a 7% and 5% increase in volumes, respectively. While annual per capita consumption of Coca-Cola products in the U.S. is more than 400 servings, in China it’s currently just 38 servings, so emerging markets still offer plenty of room for volume expansion. The company is also leveraging its distribution system to introduce healthier alternatives like low calorie drinks and still beverages.
PepsiCo, Inc. (NYSE:PEP) has been smart in focusing its attention on healthy alternatives with its Good-For-You portfolio consisting of a combination of tasty and nutritious products like its Tropicana, Quaker, and Gatorade brands. In times when global consumers are becoming increasingly conscious about what they eat and drink, the company is positioning itself on the right side of the trend. Just like The Coca-Cola Company (NYSE:KO), PepsiCo is also relying in emerging markets for volume growth.
Both companies are safe and reliable alternatives with rock-solid fundamentals, but they will hardly deliver growth rates above high single digits over the next years. Size and market saturation are hard limitations to overcome.
Sodastream International Ltd (NASDAQ:SODA), on the other hand, is firing on all cylinders. The company reported a 28.5% annual increase in revenue during the last quarter, and earnings per share grew at an even faster 33.3% to $0.60, comfortably above analysts’ expectations of $0.57 per share. The Americas segment, where The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) are facing a noteworthy slowdown, showed a whopping increase of 55% in revenue.
Performance was strong across the board. Soda maker unit sales increased 22% in the quarter, carbonator refills grew 31%, and flavor sales were 18% higher versus the same quarter in the previous year. This shows that Sodastream International Ltd (NASDAQ:SODA) customers are not only buying the machines as a transitory fad and giving them a decorative role in the kitchen, they are actively consuming the products and buying more carbonators and flavors.
The company operates under the razor and blade mode. It sells the machines for a low cost and it makes most of its profitability with the consumables. The fact that customers are effectively using the machines and buying more consumables is quite reassuring when it comes to measuring the company’s acceptance among customers and financial prospects.
Risks
Even after the spike last week, Sodastream International Ltd (NASDAQ:SODA) is trading at reasonable levels for a growth company. Valuation doesn’t seem to be a big risk here since the company trades at a forward P/E of 19.6 versus 17.8 for Coke and 17.9 for Pepsi.
If Sodastream International Ltd (NASDAQ:SODA) continues gaining market share versus the soda giants, The Coca-Cola Company (NYSE:KO) or PepsiCo, Inc. (NYSE:PEP) could feel the need to launch their own home soda kits in order to put a limit to the company´s growth. This wouldn’t be an easy decision for the big players, it would almost certainly lead to cannibalization and conflicts with their bottlers, but it’s still a possibility to watch.
Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) is another potential competitor to consider. The company has recently filed a patent for a machine which, according to Bloomberg:“would make still, carbonated and sparkling beverages, as well as soda” and this has created some jitters among SodaStream investors.
This doesn’t necessarily mean that Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) is planning to enter the home carbonation market any time soon. Besides, even if it does, Sodastream International Ltd (NASDAQ:SODA) has the first mover advantage. Still, Green Mountain has been remarkably successful with its home coffee brewers, so the company has proven that it knows how to innovate and bring new products to consumer´s homes. Green Mountain wouldn´t have it easy against SodaStream, but it’s not a competitor to overlook if it decides to go into the business.
Potential competition is probably the biggest threat facing the company, but Sodastream International Ltd (NASDAQ:SODA) is becoming stronger by the day. The company´s products are available at more than 55,000 points of sale worldwide, including home & electrical appliance stores, hypermarkets, supermarkets, department stores and convenience stores among others.
Wal-Mart Stores, Inc. (NYSE:WMT), Target Corporation (NYSE:TGT), Staples, Inc. (NASDAQ:SPLS), Best Buy Co., Inc. (NYSE:BBY), and Office Depot are some of the big stores where the products can be found and Sodastream International Ltd (NASDAQ:SODA) is also implementing alliances with companies like SAMSUNG ELECT LTD(F) (OTCMKTS:SSNLF) and Whirlpool Corporation (NYSE:WHR) to expand its presence in refrigerators and other home appliances.
Consumers are validating the product, and so are other companies. This creates a positive cycle of expanding distribution network and growing brand recognition, and Sodastream International Ltd (NASDAQ:SODA) continues growing its sales while gaining competitive strength.
Bottom line
SodaStream is revolutionizing the carbonated drinks market with its innovative approach to the industry. Consumers are embracing the product and the company is reporting amazing financial figures while consolidating its competitive position. This disruptive soda maker is positioned to continue popping higher over years to come.
Andrés Cardenal owns shares of SodaStream. The Motley Fool recommends Coca-Cola, Green Mountain Coffee (NASDAQ:GMCR) Roasters, PepsiCo, and SodaStream. The Motley Fool owns shares of PepsiCo and SodaStream.
The article This Disruptive Growth Company Still Has Upside Potential originally appeared on Fool.com.
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