Here’s our next addition to our investment portfolio:
SODA has been in the news ever since Coca-Cola announced its stake in GMCR earlier this month. We discussed our view on SODA specifically and the implications of that Coca-Cola stake in a Name That Trade post on February 6th:
However, our initial take was that the simple entry of Coke into the market legitimizes Sodastream’s business and overall market opportunity. In fact, Coke’s competitive foray with Green Mountain might entice Pepsi to take a more serious look at SODA. After all, a $1 billion purchase of SODA would be chump change for either of the beverage behemoths.
Which is why it’s a bit surprising that neither has bought the company so far, especially since they’re obviously wasting time and energy on the potential threat from SODA (like preventing Sodastream ads from airing on the Super Bowl). Traders in the pre-market were likely thinking the same thing, as SODA bounced from $33 to over $40 in light trading ahead of the open.
Finally, SODA’s fundamental valuation is quite cheap on its own, even with no takeout consideration. Here is the stock’s trailing 12 month P/E multiple, hitting a new low near 15 this week:
SODA 12 month trailing P/E, Courtesy of Bloomberg
SODA earned around the same in 2013 as it did in 2012 (near $2.40 per share), and that lack of earnings growth is why the stock got hammered in the second half of the year. However, the stock’s 15 P/E might now be too pessimistic, as analysts still project 10% earnings growth in 2014, which would be a good result for a 15 P/E name.
SODA has seen buyers active since that news, as the stock traded as high as $45 this month. However, sellers have been undeterred, selling each bounce over $40, clearly concerned about the earnings ability of SODA after its dismal January earnings report. Moreover, the fact that Israel based SODA has a factory in the West Bank might deter potential acquirers, particularly international brands like Coca-Cola and Pepsi, due to the political/publicity complications.
However, we see two main positives here for a new long stock position. First, SODA is priced quite reasonably on its own, even if there were no takeout speculation. The stock is around a 20x trailing 12 month P/E with 20% earnings growth expected over the next couple years. That’s decent on its own. So buying the stock here gets it for no potential takeout premium. For a $825 million market cap company, that’s a decent deal.
Second, SODA still has 45% short interest, while the top 10 holders own 50% of the company. So you have a relatively concentrated ownership base and a high short interest. As a result, even with no positive news over the next few months, we see limited downside for the stock.
Options are too wide, so we opted for simply buying the stock for our investment portfolio.
TRADE: Bought SODA for $39.40
Our ideal target for this position would be the gap fill around $50. In the meantime, if the stock breaks the $35 level, we’ll like take our losses and move on. Given the volatility in the stock over the last year, we don’t want to overstay our welcome if we are wrong.