SodaStream Competing Against Industry Giants

Major retirement fund TIAA-CREF drops SodaStream
By Heide B. Malhotra
Heide B. Malhotra
Heide B. Malhotra
August 21, 2013 Updated: August 20, 2013

Financial analysts are putting SodaStream International Ltd. in the same league as Coca-Cola Company and PepsiCo Inc. based on stock valuation. But they argue that SodaStream can’t compete with these two companies because of financial wherewithal and competitive advantages such as brand recognition and distribution networks.

SodaStream is a manufacturer of consumer home carbonation machines that allows people to make carbonated drinks from tap water in less than a minute. SodaStream also sells many kinds of concentrated syrups, diet flavors, energy drinks, and so on.

The company was established in 1903 and the products were originally sold in the United Kingdom. The company’s first home soda machine came to the market in 1955, and in 1973 the company began mass marketing its product, going international in the 1990s.

By 2011, SodaStream had product placement in 45,000 stores globally, including 7,000 retail locations in the United States—chains such as Costco Wholesale, Crate & Barrel, J.C. Penney, Macy’s, Wal-Mart, and Williams-Sonoma.

Going Public and Company Finances

In 2010, SodaStream went public (NASDAQ: SODA), opening at just over $30 a share on the first day. By Aug. 1, 2011, the company’s stock had reached over $77 per share, before reversing the trend to end the year back at around $32 per share. Though its stock price moved sideways during most 2012, the company continued to grow its earnings.

This year, SodaStream’s stock has been on the rise again, increasing from $44.89 on Dec. 31, 2012, to $76.11 on June 10. At its Aug. 15 closing price of $63.55, SodaStream shares are still up over 41 percent this year.

In comparison, Coca-Cola’s stock ended the day Aug. 15 at $39.09 (up 7.8 percent in 2013) and PepsiCo was at $80.91 (up 18 percent in 2013).

SodaStream’s finances are trivial when compared to these two competitors. SodaStream’s second-quarter revenue was $132 million versus Coca-Cola’s $12.7 billion and PepsiCo’s $16.8 billion. Its earnings were also marginal at $12.9 million, compared to $2.7 billion and $2 billion for Coca-Cola and PepsiCo, respectively.

According to stock analysts, Coca-Cola and PepsiCo’s growth rates are at risk due to market saturation, while SodaStream experienced strong financial performance during the last quarter, as well as during the fiscal year.

SodaStream reported a 29 percent increase in revenue and a 36 percent increase in income in the second quarter over the same period in 2012. During the same period, Coca-Cola’s revenue decreased by 2.6 percent and income fell 3.8 percent, while PepsiCo’s revenue increased by 2.1 percent and income increased by 35 percent.

Analyst Views

Despite SodaStream’s positive outlook, present financial wherewithal, and growth, stock analysts vary in their optimism—some recommending buy and others to hold SodaStream stock.

Deutsche Bank AG advises in its end-of-July market research, “We maintain our Hold rating, price target ($68) and growth assumptions” going forward.

Although SodaStream has gained a strong market presence due to a first-rate advertisement effort, sales at Wal-Mart Stores Inc. and Target Corp. are slowing. Deutsche Bank believes that unless the company increases its household sales volume in the United States and globally, it could be approaching its maturation point.

Despite optimistic market commentaries and a report by the New York Post of a possible sale of the company, Deutsche Bank is uncertain about the growth potential of SodaStream.

On Aug. 1, Zacks Research assigned the company a Zacks 2 rank (buy), based on the positive second-quarter results and continued strong demand in the United States and internationally. Furthermore, SodaStream upped its revenue growth forecast from 27 percent to 30 percent for 2013.

The Zacks analyst states, “We believe the company is well on track to achieve its long-term target to achieve $1 billion in revenues and net income margin between 15% and 18% by 2016.”

Analyst recommendations have been moving from a moderate buy consensus toward a hold over the last 3 months, according to the tracking of 10 analyst evaluations by Motley Fool.

Success Marred by Boycott Threat

SodaStream’s growth potential is marred by the fact that the company is located in a disputed Jewish settlement in Israeli-occupied Palestinian territory.

The Interfaith Boycott Coalition, a group whose mission is to end the Israeli occupation of Palestine—members include Christians, Muslims, and Jews—is asking consumers worldwide to refrain from buying SodaStream products.

TIAA-CREF, a large U.S.-based retirement fund, has reportedly divested itself of all SodaStream stock. At the end of the first quarter of 2013, TIAA-CREF held shares valued at $9 million. An announcement on the Boycott, Divestment and Sanctions (BDS) activist website states that according to present financial information, the retirement fund has divested itself of all of the company’s stock. However, no information on the divestment is available outside websites associated with the boycott.

SodaStream, due to its location in a controversial Israeli settlement, gains advantages over any would-be competitor because of tax incentives, lax regulations, being able to use the “Made in Israel” label on its products, and access to government handouts.

However, the ongoing call for a boycott of SodaStream has put the company’s products at risk. It does advise of the boycott in its financial filings. If the company is forced to leave its present location, this would have a negative impact on its finances.

“As one of our manufacturing facilities is located in disputed territory sometimes referred to as the ‘West Bank,’ rising political tensions and negative publicity may negatively impact demand for our products or require us to relocate additional manufacturing activities to other locations, either of which may adversely affect our business. … Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations,” according to the company’s Dec. 31, 2012, fiscal year end Securities and Exchange Commission filing.

Heide B. Malhotra
Heide B. Malhotra