SodaStream: Is the Market on Crazy Pills?


OK, class, today we're going to have a quiz:

A company that's trading at a forward P/E of about 35 subsequently reports the following results for the quarter:

  • Revenue up 38%, ahead of analyst expectations.

  • An adjusted earnings increase of 161%, with EPS also coming in ahead of expectations.

  • And record sales volume.

  • The company then reaffirms guidance of revenue growth of 30% and earnings growth of 60% for the full year.

What, class, will happen to the share price? Soar 10%? 30%? 50%? Maybe stay flat since full-year guidance didn't change?

Nope: The correct answer, class, is plummet by 33.8%.

That is, of course, if the market's reaction to SodaStream's (NAS: SODA) second-quarter earnings yesterday is any indication.

What? Huh? Is this thing on?
If you're a bit stunned by the market reaction, join the club.

The market's apparent beef with SodaStream is that despite its phenomenal growth in the first half, the company kept its guidance the same for the full year.

The implication is that management must be expecting growth to decelerate for the second half of the year, if full year guidance is to remain constant.

While this intuition is factually true, reacting as the market did is illogical.

Think about it: If SodaStream had simply met expectations -- meaning if the company had actually done worse -- then no one would have been upset when it did not raise full-year guidance. There would have been nothing to be disappointed by and no reason to sell.

But because the company did so much better than expected, the company stock price is punished for not promising even more. This makes no sense.

Management's response
The only justification I can think of is that by not raising guidance for the second half (and for the year), it shows that management thinks sales growth -- and demand for do-it-yourself soda -- will decelerate from here.

Alas, this doesn't fit the facts. And management did a great job of explaining why on the conference call.

Sales for the second half of the year are still expected to be above that of the first half. This is highly unusual for SodaStream's business. In its more-developed markets the company sells more in the first half than in second half, management says. The revenue split is just moving back to where it normally is . This is why decelerating sales growth in the second half doesn't portend lack of demand.

Second-half sales were also unusually high last year (making second-half 2011 sales growth projections seem weak in comparison) because of the invention's introduction to Bed Bath and Beyond (NAS: BBBY) in the fourth quarter of last year. It was a major boon for the company but skewed its results much higher to the second half last year.

Expanding and entering the restaurant market
The company is also expanding at a surprising pace. In July, it began selling machines in 700 Best Buy (NYS: BBY) stores and is currently test marketing in a small amount of Costco (NAS: COST) stores. The limited amount of products Costco carries is proving to be a challenge, however, so don't be surprised if you don't see a greater rollout there.

SodaStream also announced on the call -- and I have yet to see this reported anywhere else -- that it is entering the restaurant market.

No -- before you sell your shares out of fear -- it is not going to compete directly with PepsiCo (NYS: PEP) and Coca-Cola (NYS: KO) in fountain soda. Rather SodaStream is going to provide restaurants with a system for carbonating water for use in carafes that would replace fancy-dancy European sparkling water. They did not give much more detail than that.

Stay the course
All in all, I think aggressive growth investors will want to stay the course. The stock is the cheapest it has been in a long time, and the all-important growth in higher-margin consumables (syrups and CO2) -- 203% in the United States -- shows that SodaStream's "razor and razorblade" business model is still in place.

At the time thisarticle was published Fool contributor Chris Baines is a value investor who loves soda. Follow him on Twitter @askchrisbaines. Chris's stock picks and pans have outperformed 85% of players on CAPS. Chris owns no shares of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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