The Perpetually Misunderstood SodaStream

The sky appears to be the limit for SodaStream , but investors would never know that based on the market average multiples applied to the stock. While SodaStream provides fast growth and unlimited potential, the stock trades at pedestrian multiples, including less than 19 times its 2013 earnings estimates and 13 times its adjusted EBITDA forecasts. Remember that beverage industry giant Coca-Cola  trades at 20 times its earnings, and related home beverage market participant Green Mountain Coffee Roasters trades at 21 times its fiscal year 2013 earnings. 

SodaStream remains the unquestioned leader in home beverage carbonation systems, yet the market tends to stress on the smallest of details. In the last quarter, it was the lackluster reported flavor sales growth of only 7%. Remember that Coca-Cola would be happy with even 7% growth considering the expectation of a 2% sales decline this year. Investors should review the details of the earnings call and they might not be so quick to dump an innovative leader in the burgeoning home carbonation market based on that number. It was clear that logical reasons exist for a lackluster number, ensuring that SodaStream's growth plans remain intact. 

Sell out confusion
The biggest confusion with SodaStream continues to surface around the revenue generation point between distributors and direct to retailers. For long-term investors, it's a good reason why investors should focus more on the yearly data and not the quarterly swings. More importantly, the sell out data from retailers provided by NPD is the ultimate key because it evens out the inventory fluctuations of distributors or retailers.

While domestic flavor consumables dropped domestically year-over-year to 2.1 million units, the NPD data showed flavor unit growth of 53%. For 2013 through September, NPD shows unit growth of 265% in gas refills, 139% on flavors, and 49% on soda makers. When viewed in this light, the numbers paint a very bullish scenario for SodaStream. 

The perplexing part on the call was the apparent inability of analysts to understand this basic concept of retail. End users continue to buy flavors and utilize the company's CO2s based on the high gas refills growth. Ironically, analysts failed to question this discrepancy and instead assumed a major problem in the U.S. The company distinctly explained that a major U.S. retailer well known to be Wal-Mart made a system-wide decision to reduce inventory levels. SodaStream has already acknowledged that further discussions with the retailer identified an under-stocked situation that required additional orders during the fourth quarter. 

Growing flavor options
Considering SodaStream's plans to develop into the razor blade model, the concerns over flavors is understandable if flawed. The razor blade model involves getting razors in the hand of consumers at nearly all costs in order to make money in the repeat business of buying the blades. In this case, soda makers are the razors and the consumables of flavors and gas refills are the razor blades.

The flavors part of the business is where SodaStream can hold an advantage over Coca-Cola. The biggest issue with Coca-Cola is its limited options, especially for storing inventory of different flavors at home. One might have Coke, Diet Coke, and another flavor, but beyond those options it becomes expensive and space consuming if you don't have consistent consumption. This is where SodaStream comes in.

Consumers have the option of 60 flavors in the U.S., including 10 co-branded flavors. These flavor options can easily be stored in 16.9 ounce bottles that provide the equivalent of 33 cans of soda. Note that the flavor bottle is similar in size to a 20-ounce Coke bottle. The company plans to add 10 new co-branded flavors early next year with the launch of Diet Ocean Spray, V8 Splash, EBOOST, and Cooking Light along with the intro of Happy Hour Cocktail Mixers. 

Not only can a consumer conveniently own a large portion of the flavors, but SodaStream recently introduced SodaCaps to provide a simple, single-serve consistent dosing system. Remember that the single-serve concept for coffee is what propelled Green Mountain Coffee to a huge success story and a market value of $10 billion.The Keurig K-Cup system became popular due to allowing numerous flavor options to consumers along with the convenience of a single-serve machine. SodaStream has also alluded to additional partners that the dosing consistency is a key factor in the decision making process to embrace home carbonation.

Bottom line
Anybody following SodaStream knows the company's stock has fallen $20 due to apparent confusion over the all-important flavor sales in the domestic market. Despite NPD data and widely acknowledged Wal-Mart inventory adjustments impacting all suppliers, the stock still sits at below growth rate multiples. The most perplexing part is that SodaStream can't obtain a larger earnings multiple than the beverage industry leader that it's attempting to replace. Coca-Cola is a market leader that can't hardly afford to compete in this category or disrupt its existing market. SodaStream also has a lower multiple than the slower growth coffee maker that is Green Mountain Coffee.

Regardless of how the market views it in the short-term, any investor doing research can quickly summarize that SodaStream is developing into a story that can't be denied. The earnings call provided countless stories of gaining shelf space and priority displays at major retailers. Investors might want to grab the company's stock while investors remain perpetually confused about a story that isn't confusing at all. 

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Mark Holder and Stone Fox Capital clients own shares of SodaStream. The Motley Fool recommends Coca-Cola, Green Mountain Coffee Roasters, and SodaStream. The Motley Fool owns shares of Coca-Cola and SodaStream. Try any of our Foolish newsletter services free for 30 days. 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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