The concern surrounding the fourth-quarter earnings report from SodaStream International Ltd (NASDAQ:SODA) on Wednesday has to be focused on expectations. SODA stock has roughly quadrupled from lows of just under a year ago; SodaStream earnings have crushed estimates in each of its last three quarters.
Analyst estimates for the quarter project 25% earnings per share growth and a 10%-plus increase in revenue. Those are figures in line with year-to-date performance — even though the fourth quarter offers a tougher comparison for SODA.
All told, there’s a reasonable amount of optimism ahead of SodaStream earnings. SODA stock now trades at about 27x consensus 2016 EPS plus nearly $2 per share in cash — its highest earnings multiple since its glory days earlier this decade. That was before SODA plummeted to below $12 in early 2016, and before the company pivoted from offering at-home soda to a focus on healthier flavored sparkling water.
Clearly, that pivot was worked — the question is whether the recent success is priced in at this point. Q4 likely will provide an answer to that question. That answer, in turn, likely will move SODA stock sharply. But in which direction?
Why SodaStream Earnings Matter This Quarter
SodaStream earnings in Q4 2015 weren’t exactly impressive. Constant-currency revenue declined almost 2%, with Americas revenue down 19% as reported. Adjusted EPS declined to 24 cents from 35 cents.
That said, the report did beat analyst expectations, and SODA stock gained coming out of the release. SodaStream was near an all-time low before the release, to be sure, but there was enough in Q4 to stoke a bit of optimism. Sales and marketing spend, which had been cut sharply, declined at a much faster rate than sales. Currency aside, performance was almost flat. And consumables sales were down just 3%, which seemed to imply that, at the least, there was dedicated core base of SodaStream users.
With the company changing its strategy — and the name of its flagship product to a “Sparkling Water Maker”, de-emphasizing soda — there was a hope for a turnaround that combined the existing user base with success attracting new, healthy and/or eco-friendly consumers.
What a difference a year makes. Heading into Q4 last year, SODA stock was down almost 85% from 2013 highs. A year later, the turnaround narrative has taken hold, and SodaStream has gained over 300% from its 52-week low, set just ahead of last year’s report.
But those gains change the narrative this year. An “OK” quarter a year ago boosted the stock, as expectations were low. It’s just the opposite this year. Even with comparisons a bit tougher, particularly in terms of cost-cutting and margins, expectations look high. And that could set SODA stock up for a tumble.
What to Expect From SodaStream Earnings
The flip side of that argument, however, is that an impressive Q4 cements the turnaround narrative. A fifth-straight earnings beat undercuts the bear case for SODA stock significantly.
The increase in SodaStream earnings — adjusted EPS is up 72% through the first nine months — isn’t just coming because the company is comparing against one of the worst years in its history. It’s coming because the pivot to sparkling water is working, and because recent cost-cutting efforts have improved margins.
Fundamentally, then, Q4 is an important quarter. An earnings miss puts 2016 EPS around $1.60 or so; assuming a lower, 10%-20% earnings growth rate next year gets EPS to maybe $1.85 or so. That in turn supports a low-20s EPS multiple — and values SODA stock at $40 against about $47 heading into the report.
Conversely, a beat pushes 2016 EPS to $1.75; assuming SodaStream can keep momentum going next year, suddenly $2-plus EPS in 2017 looks reasonable.
The current multiple of 27x, or even a slight compression to 25x or so, plus cash gets shares to $55 or better. Both cases suggest a double-digit move in SODA coming out of earnings – and the market seems to think that’s a likely outcome.
How to Play SodaStream Earnings (Or Not)
The options market certainly seems to support the thesis that SODA is likely to make a big move. Last trades imply a $4.47 cost for a $47 straddle expiring Friday — requiring a 9.5% move in either direction simply to turn profitable. “Iron condor” strategies — which can be used to bet against a major move — offer returns as high as 4 to 1. That seems an interesting play, if only for the possibility that relatively in-line results lead to market to shrug and wait for the first quarter report in May.
In Q1, SODA has an even tougher comparison — and perhaps a better chance to show whether the turnaround is a short-lived rebound or a long-term inflection point.
All told, SodaStream earnings seem likely to move SODA stock, and possibly in a big way. As for which way — I truthfully don’t know that there’s an edge on either side. SodaStream stock isn’t cheap; clearly, a good deal of success is priced in. At the same time, I’d be hesitant to short SODA given its performance of late. What is clear is that Q4 is likely to provide some fireworks — and some very happy, and very unhappy, traders.
As of this writing, Vince Martin had no position in SODA stock or options.