As much as I want each and every Israeli company to succeed, I just didn’t think Sodastream International Ltd (SODA) is going to make it over the long-term.
I was always skeptical of SODA because making soda at home just seemed like a fad for most people, especially Americans. It just seemed to me that this was no different than those ice cream makers that people get for their wedding and it seems so cool and exciting, and then it sits on a shelf after one use.
It just made no sense to me that people would be willing to pay a lot of money for the machine, for the CO2 cartridge refills, and for the flavoring, when they could get an infinite number of choices at the store. Yeah, they have to “lug” it home, but when you are shopping, you are lugging everything home.
Then things got worse for SODA. The world suddenly realized that sugary water was unhealthy. The legacy soda companies saw declining revenues and comps as people around the world decided to get healthy.
So SODA pivoted and moved into sparkling water. The problem for me was that the same problems existed. Sparkling waters of all shapes and kinds are available at the store and for much less.
Now SODA has reported earnings and, so far, I’m pleased to say that I may just be wrong.
SODA Stock Results
Revenue was up 17% to $119 million compared to $102 million last year. This resulted in a massive 73% increase in adjusted EBITDA to $15.4 million compared to $8.9 million last year. This filtered down, so to speak, in fine form to the bottom line. Net income increased 121% to $7.8 million, up from $3.5 million.
SODA has also been enjoying increased operating efficiencies, combining operations into one plant in southern Israel. The move to water has also resulted in improved margins.
Now, before we get too excited, I do have some ongoing concerns. Sparkling water maker starter kits, which is the new flagship product, increased from $29.7 million in sales to $39 million, or 9.3%. Consumables increased 9.8% to $78 million.
From a unit perspective, the starter kits sold 491,000 in Q2 last year and rose to 637,000 kits this quarter, with CO2 refills jumping from 6.94 million units to 7.54 million.
It’s good news, but the question remains as to just how good this is. Let’s say SODA was able to return to $42 million in annual profit, as it made in FY13. The market cap of $596 million would mean it would trade at about 14x earnings. We’re not there yet, though. The run rate is presently $31 million, for a P/E of 19.
Much of this depends on whether this becomes Fad 2.0, or if the water product is more “sticky”. Personally, I don’t see the difference between people getting excited about sparkling water at home and then moving on as the novelty wears off, and with what happened with soda. I think the products are effectively interchangeable, although water is indeed healthier.
However, that healthy alternative angle may end up being a distinguishing feature that carries SODA stock forward. It’s a tough call. My guess is the path of least resistance on SODA stock is up, but for the short term. I don’t see this conquering the world, but the risk-reward near term seems reasonable to get involved.
Long-term, however, I have my doubts.
As of this writing, Lawrence Meyers has no position in SODA.
