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SodaStream Poised for Big Returns

By    |   Thursday, 01 Dec 2011 05:41 PM

SodaStream International (SODA) manufactures home beverage carbonation systems that enable people to make carbonated soft drinks and sparkling water from ordinary tap water. The company’s products are sold under the SodaStream brand name in most countries and under the Soda-Club brand name or other brand names in certain other countries.

SodaStream’s systems, which the company sells through approximately 50,000 retail stores in more than 40 countries, include decorative countertop soda makers, exchangeable carbon-dioxide (CO2) cylinders, reusable carbonation bottles, and more than 100 soda flavors.

The company’s systems sell in the United States at prices ranging from $79 for a basic plastic soda maker that uses a plastic carbonation bottle, to $199 for a high-end model that has stainless steel components and utilizes glass carbonation bottles.

SodaStream’s market strategy involves efforts to capitalize on recent trends in consumer behavior by making its products cost-effective, convenient, healthy, and environmentally friendly.

In regard to that goal, the company’s products provide significant cost savings for someone who carbonates soft drinks at home, as opposed to purchasing carbonated water or soft drinks. For example, a person can make a carbonated soft drink using the company’s system for approximately 67 cents per liter, excluding the initial cost of SodaStream’s system, compared to an average cost of around $1 for a liter of Coca-Cola. Consumers in the United States typically pay $4.99 for a 500 ml bottle of one of the company’s flavors, which produce 12 liters of carbonated soft drinks.

Meanwhile, the company’s products present consumers with a healthy alternative to traditional carbonated soft drinks, with its flavors containing two-thirds less sugar, carbohydrates and calories than leading soft drink brands, one-third less caffeine than popular carbonated soft drinks, and significantly less sodium per serving than many popular carbonated soft drinks.

People who own SodaStream’s system typically use the company’s carbonation bottles many times instead of throwing away those containers. Hence, the company’s system enables soda drinkers to be environmentally friendly. That’s an important factor because studies have shown that 68 percent of Americans are interested in being more environmentally friendly by purchasing “green” products, and that consumers are increasingly prioritizing health and wellness by favoring more natural and fresh food and beverage products.

Although SodaStream faces competition from several other makers of home beverage carbonation systems, the company has the largest market share of those systems in each of the 12 large markets in which it operates and it faces no competition in the significant majority of other markets around the world, including the United States.

U.S. retailers that currently sell the company’s systems include Sears, Macy’s, Bloomingdale’s, Kohl’s, Williams-Sonoma, and Crate and Barrel. Meanwhile, the company is pushing hard to get the world’s largest retailer, Wal-Mart, to sell its systems. SodaStream’s CEO recently said in a CNBC interview that he is confident that Wal-Mart will offer the company’s products at some point in the future.

Gearing up for the Christmas shopping season, the largest U.S. membership-based retailer, Costco, is offering SodaStream’s systems at 240 of its U.S. outlets, while Best Buy and Staples are offering the company’s systems at all of their U.S. stores.

Perhaps more importantly, approximately 4,800 U.S. retailers now offer beverage-grade CO2 refills for the company’s exchangeable carbon-dioxide (CO2) cylinders — almost double the number that offered that service during 2010. That’s a very important development because a key element of SodaStream’s long-term growth plan is based on the “razor blade” model, that is, on selling complementary after-market products that generate larger profit margins than the company’s complete system.

In regard to that program, consumers who exchange their empty CO2 cylinders for newly filled ones pay only for the CO2. The empty cylinders received by those retailers are then delivered to one of SodaStream’s filling plants where they are inspected, cleaned, and refilled for distribution. Consumers in the United States typically pay either $14.99 for a 60-liter CO2 refill or $29.99 for a 130-liter CO2 refill. Those CO2 refills generate a substantially higher profit margin than the company’s soda makers.

Although SodaStream sold more than 2.6 million of its home beverage carbonation systems worldwide during 2010, the company only recently began selling its systems in the world’s largest consumer products market — in the United States. During the quarter ended Sept. 30, 2011, the company sold 717,000 soda makers and more than 1 million syrup bottles in the United States alone.

Financial Condition

SodaStream is very strong financially, with the company’s cash alone covering all of its financial obligations as of Sept. 30, 2011. As of that same date, the company’s long-term debt represented just 0.6 percent of total tangible assets.

Meanwhile, the company has consistently grown its revenues and earnings. For example, the company grew its revenues to $160.7 million during 2010 from $99.9 million in 2009 and its net earnings per diluted share to 69 cents from 7 cents during that same period. During each of the past three quarters, the company increased its both its revenues and its net earnings per diluted share by a year-over-year rate of at least 37 percent.

Looking forward, SodaStream expects to continue to grow its revenues and earnings at a fast rate, with the company’s CEO, Daniel Birnbaum, saying that he expects the company’s revenues and earnings to grow 20 percent and 25 percent, respectively, over the long-term.

In regard to the current quarter, the company expects its revenues to increase by approximately 24 percent, as compared to the same quarter a year ago. For the full year ending Dec. 31, 2011, the company expects its net income to double compared the prior year.

In spite of SodaStream’s rapidly growing revenues and earnings, the company’s stock closed at a price-to-earnings growth (PEG) ratio of just 0.60 on Nov. 30, 2011, which indicates that stock market participants, on average, are substantially undervaluing the company’s stock.

Therefore, my research suggests that now is a good time for persons who choose to invest a portion of their financial market assets in stocks of small, growth companies to seriously consider investing in SodaStream’s stock.

Note: The author of this article owns shares of SodaStream (SODA).

About the Author: David Frazier
David Frazier is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes two very successful investment newsletters. Discover more by Clicking Here Now.
 

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SodaStream International (SODA) manufactures home beverage carbonation systems that enable people to make carbonated soft drinks and sparkling water from ordinary tap water. The company s products are sold under the SodaStream brand name in most countries and under the...
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Thursday, 01 Dec 2011 05:41 PM
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