Name That Trade – $SODA Breakout?

by Enis May 9, 2013 3:44 pm • Commentary

The price action in Sodastream over the past week has been an absolute battle around an important resistance level.  The stock rallied into its earnings number, reported earnings yesterday morning, sold off after the report (which seemed pretty good to me), and then is getting bought hard again today.  All of that back and forth, emotional action has occurred as the stock tests its $54-$55 resistance area:  


[caption id="attachment_25712" align="alignnone" width="632"]1 year daily chart of SODA 1 year daily chart of SODA[/caption]

I’ve included the lower volume panel to show the increased interest around this level as the stock has moved back and forth in the past week.  While a clean breakout would be nicer, I think the stock has built the necessary energy, and I’m looking for the breakout to hold.

But the stock doesn’t look attractive on just a technical basis.  SODA initially peaked my interest back in early March, after I delved into their 10Q and found nothing of much concern to justify such a high short interest (still around 40%).  This is what I wrote in that post:

The main reason for that growth in the U.S. was due to sales of the Soda Maker Starter Kits.  So my anecdotal feeling is backed up by the numbers.  SODA is getting serious traction in the U.S.

As for 2013 guidance, the company said that it expected revenue and adjusted earnings to grow 25% in 2013.  That brings us to the question of valuation.  Normally, new, innovative product companies like SODA are excessively valued, but SODA actually looks a bit undervalued.  Granted, the company is no longer expected to grow 40%+, as it was in 2010 and 2011, but even at 20-25% earnings and sales growth, a multiple of 23.5x is on the cheap side of this market.  Clearly, many market participants don’t think the company can achieve its guidance going forward.  Here is the historical P/E:

Trailing P/E for SODA, Courtesy of Bloomberg

Trailing P/E for SODA, Courtesy of Bloomberg

The multiple has ranged between 17 and 32, so it’s not at either extreme relative to its own history.  But what gives me confidence is its most recent earnings report.  The traction it has gained in the U.S. should give it more growth opportunity going forward.

Fast forward to yesterday’s earnings release, and the U.S. continues to be the driver of the growth, with little change to recent trends.  The U.S. market is by far the biggest opportunity for SODA, and its 90% yoy increase in sales in the U.S. (34% overall, as the rest of the world was only up 10%) is a strong reason for optimism.  Its valuation doesn’t seem to reflect that optimism.

With the stock up 8% today, I’m not going to enter a new trade on the name here.  But I am ready to pull the trigger if the stock does make a retracement back to the $54-$54.50 area, in anticipation of a larger long-term move.