Investors looking for a stock that is on sale should take another look at SodaStream. Surprisingly for many is that the company has been around for over 100 years, being founded in 1903. Many consumers worldwide, are also surprised that the company is actually based in Israel. The products are presently available in 41 countries.
The company’s market strategy is to sell consumers carbonated drinks that are made at home. Users will need to purchase a carbonation device. The machine carbonates water by adding carbon dioxide from a pressurized cylinder to produce soda water.
The business works rather well because if you would like some kind of flavoring to add to the carbonated drink, you will need to purchase concentrated syrups and fruit concentrates from SodaStream. There are over 100 varieties available.
SodaStream merged with Soda-Club in 1998. Shortly thereafter, the company modified their consumer emphasis to promote more healthful drinks. The stock finally went public in 2010. There are 13 production plants worldwide, with the main one located in the West Bank settlement of Ma’ale Adumim. Travelers to Israel are often surprised to see a popular American product ,being produced in the Middle East.
The stock price has fallen from the upper $70s USD (United States Dollar) a share in the middle of 2011 to below $30 USD now. The stock is around the price it originally sold for. At the end of April of this year, the stock was still above $45 USD a share. It has been on a downward trajectory ever since. This month it has finally dipped below $30.00 USD.
On Friday July 18, the stock moved up from an all time low of $28.85 USD back to $29.11 USD. It ended the business day up $0.13 which is an increase of 0.45%. The high for the day had been $29.73 USD.
Market capitalization for the firm is $599.96 million USD and P/E ratio (ttm) 14.83
An investor at this point, would want to know if there will be a rebound in the stock price and when will the stock reach it’s lowest level in price?
After the company went public, it wisely moved to create more business partnerships. Previously, several famous name brands were available in concentrate form. These included Irn-Bru, Fanta, Sunkist, and Tizer. The company also offered diet concentrates sweetened with Splenda. In January 2012, SodaStream entered into a partnership with Kraft Foods. The new business agreement involved the use of Crystal Light and Country Time brand flavors, with the home carbonation system of SodaStream. Later the same year, the Kool Aid line was added to the partnership.
The company would also partner with Ocean Spray in 2013. Another major break for SodaStream last year was the agreement with Samsung, that refrigerators built by the company would be made available for sale with built-in SodaStream sparkling water dispensers.
So there is no question that SodaStream is willing to innovate and develop new partnerships, to the benefit of the company at large.
It was these types of initiatives and others that helped the company increase in value so rapidly following the Initial Public Offering of Stock (IPO), in November of 2010. By the summer of 2011 market capitalization for the company had increased to $1.46 billion USD, from the original $367 million USD. During 2012, the stock showed aggressive growth with earnings per share growing 57%. When in June 2013, there was a rumor that PepsiCo was about to take over SodaStream it was for $2 billion USD. The action was later denied by PepsiCo.
Industry analysts had predicted 27% growth for 2013 and at least 30% growth for the company over the next 5 years. Although sales did increase in 2013 net earnings stagnated at 2012 levels.
What had gone wrong?
SodaStream does has a diversified market. Europe for example, only accounts for 52% of sales. As of 2012, SodaStream products have been available in the United States, at Walmart. Since this chain has over 2,900 locations in the country, there is certainly enough availability.
Company records show that sales in the United States increased from $4.4 million USD in 2007 to $40 million USD by 2011.
Despite record sales, profit margins seem to be in retreat. In 2012, $43.86 million USD of net income was earned on $436.32 million USD of revenue. In 2013, $41.5 million USD was earned on an annual revenue of $562 million.
What is happening?
Part of the answer may lie with competing rivals. The company needs to remain competitive by lowering prices which end up hurting profits. SodaStream has to compete with such notable companies as Hamilton Beach and Cuisinart. These kitchen appliance makers and a number of smaller firms, are offering new models and versions that are very competitive.
Although the CO2 cartridges used by these devices are not interchangeable, the soda syrups and flavored concentrates certainly are. More vendors are offering ever greater choice to the consumer as far as taste.
Another issue is the CO2 cartridges or cylinders themselves. Once they are empty they must be returned to a SodaStream reseller, for replacement. The cartridges at 14.5 ounces will typically allow 60 liters of product to be produced. Larger models and therefore canisters of CO2 are also available. The cylinders are designed to make unauthorized refilling that can be done locally and rather inexpensively, more difficult. The SodaStream canisters include a proprietary valve designed to prevent refilling. This company practice, raises the cost of refilling the tank to the consumer anywhere from 10 to 20 times the market rate.
Excluding the initial cost of the machine the typical cost to the end user is $0.25 USD per liter of carbonated water. Another $0.50 will be needed on average for flavoring. This often makes the final cost of the home produced drink more expensive than pre-mixed sodas and other carbonated drinks. This is the result of the cost of refilling the canisters and the cost of buying soda syrup, in rather small retail quantities. However, it is important to note that various products have been proposed by several independent vendors, to deal with the high cost of refilling the canisters of the original SodaStream CO2 ones.
Of course if one considers the original appliance, the CO2 replacements and the syrups and other flavorings, it allows a steady stream of income for the company to continue.
A major difficulty for the company that may force a change in the direction of the company, is the site of the primary manufacturing plant in the West Bank. The land the factory sits on was property that was expropriated by the state of Israel. By international law, some regard the taking of this area of land which was then resold, as illegal. In addition, the European Union has ruled that products made in the West Bank are not subject to agreements between Europe and Israel on customs.
Norway, Sweden, and Finland have boycotted all SodaStream products from the West Bank, forcing the company to supply these areas with merchandise made in China. The controversy continues with a legal challenge in France and some boycotts of the company’s products in the United Kingdom.
It must be said that there is an environmental aspect to relying on SodaStream to provide a customer carbonated drinks. There will be an absence of empty soda and drink bottles, that over time can make quite a difference in space for land fills.
Share prices for the company (SODA) are now at 5 year low lows, as competitive fears have been heightened. Coca-Cola, Keurig Green Mountain, and other beverage companies are surveying future growth opportunities associated with entering the market of home produced carbonated drinks. ‘
The business in the United States, one of the leading markets has also begun to lag, because of a number of issues involving cost, convenience and competition from other companies.
Although Coca-Cola and partner Keurig have now entered the home produced soda industry, SodaStream is still expected to grow as a company.
The stock for SodaStream has declined in price by 50% in the last year. The first business quarter for 2014 showed growth at only 0.5% year over year. The decline in business in the Americas as a whole was registered at 28%.
The bad news for the company in some respects needs to be tempered with what are the future growth prospects. Revenue for 2014 is expected to increase 15% over last year for the company worldwide. This translates to nearly $650 million USD. The 40% annual growth during the last 3 years is unlikely to be repeated any time soon if ever, but the company still is expanding into new markets. The first quarter for 2014 saw 17% growth in Europe and 28% expansion in the Pacific/Asian region.
It is also important to note that Keurig itself is expected to grow at 7.8% in 2014 and Coca-Cola at a mere 0.2%. So in comparison, SodaStream looks to be doing well overall in a crowded market. SodaStream may also decide to partner with another company, to add market share.
SodaStream is now trading less than 15 times forward earnings. By comparison Coca-Cola and Keurig trade at nearly 19 times and 31 times earnings respectively. Considering the growth expectation for all 3 companies, SodaStream provides a much better overall investment. Although the company may see further declines in share prices in the near future, this investment writer is predicting it is at or near the low point. The stock at this juncture is basically, on sale for potential investors.