SodaStream (SODA) Could be At Crossroads After Disappointing in Q3 Earnings Estimates

Joel Anderson |

SodaStream, scarlett johansson, israel, boycott israel, sodastream stock, pepsi, coca cola

So, it turns out that revenues for Israeli beverage company SodaSteam International (SODA) aren’t so much streaming at the moment. Shares of the company are getting hammered, down nearly 21% in early trading, after the release of preliminary Q3 earnings that were a huge disappointment.

The company is estimating revenues of $125 million, a 13.5% year-over-year decline to go with a $25 million miss of the consensus estimate of Wall Street analysts. It’s also anticipating operating income of $8.5 million, which is less than half of last year’s figure. All told, it’s a pretty brutal preview of an earnings report that has a company that just a month ago was the center of buyout rumors.

"We are very disappointed in our recent performance," said CEO Daniel Birnbaum, in a refreshingly frank assessment of his company’s current issues. "Our U.S. business underperformed due to lower than expected demand for our soda makers and flavors, which was the primary driver of the overall shortfall in the third quarter. While we were successful over the last few years in establishing a solid base of repeat users in the U.S., we have not succeeded in attracting new consumers to our home carbonation system at the rate we believe should be achieved. “

SodaStream Buyout Rumors Quieted For Now

SodaStream shareholders have been through a lot.

First, the company was at the center of a controversy/fire storm/tempest in a teapot over a Super Bowl ad featuring Scarlett Johansson that called out Coca-Cola (KO) and Pepsi (PEP) by name that Fox (FOX) , somehow, refused to air, making for the most tremendously disappointing end-result for the headline "Banned Scarlett Johansson Super Bowl Commercial" imaginable. It was a pretty strange episode, but SodaStream, arguably, ended up getting more eyeballs on the ad through the Streisand Effect than it would have by simply airing it and did so without have to pay for the air time.

However, the stirring of the Scarlett Johansson story resulted in increased attention on the fact that one of SodaStream’s manufacturing plants is located in the West Bank, a fact brought to the fore after Johansson was forced to resign from her role as an ambassador for human rights organization Oxfam, role she had held for eight years, due to her association with SodaStream. Of course, as is always the case, there was a measured and balanced response from the general public regarding the Israel/Palestinian situation and SodaStream’s part in it. Just kidding, it absolutely injected a divisive political issue into SodaStream’s brand that SodaStream clearly wanted nothing to do with.

However, as of early June of last year, these appeared, for a moment at least, to be relatively minor speed bumps as rumors swirled that Pepsi was about to snap up SodaStream at $95 a share. The rumor helped spike shares up above $70 a share despite Pepsi almost immediately denying their hypothetical interest. However, it did seem to keep the idea afloat that a beverage or food conglomerate giant buying up SodaStream for their own first step into the self-created soda world.

The rumors kept popping up, with the new price mentioned at $40 a share as recently as last month. Whoops.

SodaStream Having a Rough Time of It

SodaStream is currently hitting a 52-week low, but that’s not telling the whole story. The stock’s been going through a lengthy, lengthy decline. Since peaking during the potential of the Pepsi buyout, the stock’s fallen just a hair under 70%, shaving about $1 billion in value off of the company’s market cap.

The issue is, really, that SodaStream’s just not making enough money. It’s not selling enough of its devices, particularly in America, where a lot more growth was anticipated. A look at annual earnings doesn’t tell the whole story, as the company’s revenue was rising steadily through the end of 2013. However, the first sign of issues was a part of that FY 2013 when net income fell by $2 million.

It came as a bit of a surprise when it was announced in January, especially given that the prime culprit was a Q4 that produced net income of just $1 million. This was followed by a big pull back in Q1 and just $2 million in profits. Then Q2, while climbing to $9 million in profits, was still a significant decline from the year prior. Now, with the anticipated $8.5 million in profits on $125 million in revenue for Q3, SodaStream appears to be flagging in the worst way.

Where is SodaStream Headed?

The ugly stock chart is subsequently not difficult to understand. Prior to Q4 of 2013, the company seemed incapable of doing wrong with consistent improvement in revenue and profits. Then, in the last year, the rug’s been pulled out from under investors. All told, SodaStream needs to do more business in the United States to keep sustaining growth, something Birnbaum appeared focused on in his comments in the press release.

“The third quarter results are a clear indication that we must alter our course and improve our execution across the board,” he said. “We have already begun a strategic shift of the SodaStream brand towards health & wellness, primarily in the U.S., where we believe this message will resonate more strongly with consumers. In addition, we are developing a comprehensive growth plan for the Company that will encompass Marketing, Product and Innovation, Distribution, Operations and Organization. We intend to share more specifics around our growth plan when we report third quarter results later this month."

DuPont Report Provides a Muddy View of Future

All told, things may not be quite so bad for SodaStream as the last year of earnings reports has seemed to indicate.

"We have a strong balance sheet and are well positioned with ample liquidity to invest in the areas of our business that we believe will fuel profitable growth in the years ahead,” said Birnbaum. “Despite our current challenges, we continue to be very confident in our business model and the global prospects for SodaStream. We firmly believe that our actions to shift the brand and improve execution will strengthen our leadership position in the home carbonation category and deliver enhanced shareholder value."

A quick look at the company’s DuPont report could actually show that Birnbaum isn’t just drinking the kool-aid flavored home carbonation beverage. A DuPont report, based on a valuation technique developed by DuPont (DD) in the 1920s to gauge the stake it had just purchased in General Motors (GM) , breaks down a basic return on equity (ROE) figure into three independent components that tell a more complete tale.

In applying this technique, the initially ugly ROE for SodaStream starts to look a little sunnier. While the company is well behind its industry peers in this metric, the primary reason would be that fact that SodaStream is heavily leveraged, with an equity multiplier nearly triple the industry average. That’s clearly not a good sign, potentially indicating that SodaStream’s overextended itself and taken on too much debt while trying to expand.

However, SodaStream’s positive net margin is well ahead of its competition. It’s a key factor because, while asset turnover and the equity multiplier should ideally match the industry average, net margin is the factor that a company can always strive to keep increasing. So, it’s possible to take the view that SodaStream is simply going through growing pains, investing big money in an ambitious plan that’s bound to have some hiccups along the way.

After all, even after its 15-month slide, it’s still a $500 million company that’s regularly turning a profit. Arguably, the stock slide has more to do with overenthusiasm from the markets over the company’s early success. If Birnbaum’s shift of focus to a health-minded approach for the American market ultimately bears fruit, it’s not hard to see a pretty rapid turnaround for the company.

That said, it’s also worth noting that the crucial net margin metric has declined year-over-year from 2012-2013 and looks to be en route to another slip in 2014. It’s a trend that, if not reversed, could indicate that, rather than a promising young company with a lot of room for expansion, SodaStream’s a young company that tried to expand too fast and drastically overestimated the level of interest it could anticipate from the American market.

Either way, SodaStream appears to be at a critical juncture. The company needs to take action to expand its sales into American markets at a more-rapid clip. Without growth there, it’s not hard to see how slagging profits and overleveraging could blow up in the company’s face. However, if a new marketing focus can realize the levels of growth SodaStream seems to believe is possible, this could easily become the low point from which the company rebounds hard and demonstrates that its plans for expansion were ambitious but justified.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
PEP Pepsico Inc. 100.60 1.57 1.59 4,594,602
SODA SodaStream International Ltd. 36.51 0.24 0.66 206,173
GM General Motors Company 35.41 -1.02 -2.80 22,753,352
DD E.I. du Pont de Nemours and Co. 73.13 -0.49 -0.67 3,233,772
FOX Twenty-First Century Fox Inc. 27.37 -0.71 -2.53 2,858,366
KO Coca-Cola Company (The) 40.36 0.19 0.47 11,176,301

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