The New SODA King?

By Matthew McCall | May 20, 2011 AAA

It may not be good for you, but that doesn't not stop hundreds of millions of people around the world from drinking it every day. The sugary drink I am referring to is soda, or, depending on where you live, this fizzy beverage may otherwise be known as "pop".
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The traditional way of drinking soda is from a can, bottle, or at alocal restaurant. But the future may be making your own soda at home at a lower cost and - and at a lower cost to the environment. Israel-based SodaStream International (Nasdaq:SODA) manufactures home beverage carbonation systems that allow its customers to make soda at their convenience. The company also offers more than 30 different syrups that include regular and diet flavors.

SodaStream's Stream of Income
The company makes money by selling the machines that range from $80 to $200, but the real money comes from the supplies. The customer must buy the syrup, carbonators, bottles and bottle caps. Even though it could be less expensive than buying cans of soda at the grocery store, it is a steady flow of income for SODA.

When the company reported earnings this week, the stock surged 23% on a rise of unit sales by 99%. The total revenue was up 50% and net income increased by 38%. The numbers obviously impressed investors and the stock hit an all-time high volume. The stock trades with a hefty forward P/E ratio of 44, but if it is considered a growth stock by large investors, it could trade with a much higher multiple before the rally ends.

Trouble for Traditional Soda Companies
The two top dogs in the soda world are Coca-Cola Company (NYSE:KO) and PepsiCo (NYSE:PEP), both boasting market caps of more than $100 billion. Both stocks have done well in the past couple of years, with KO hitting a new decade high this week. PEP is not far behind, hitting a high and trading at its best level since 2008.

It is not fair to say both KO and PEP are scared of the new competitor, but I am sure they are watching the growth closely and are working on similar ideas. If SODA continues to grow customers at its current rate, there is a good possibility you will see the big-name soda manufacturers make a move into the home soda-making process. Or they can always buy SODA in a merger and benefit from an already established brand in the niche sector.

Comparables
The only publicly traded company that I could find that is comparable to SODA is Green Mountain Coffee Roasters (Nasdaq:GMCR). GMCR is the maker of the Keurig single-cup brewing machines that coffee drinkers can use at home to make a variety of different coffees. SODA is similar in that it will look to capitalize on its customers' ongoing purchase of products, just as GMCR has in the past few years. I am not predicting this happens to SODA, but GMCR's stock price is up 41,000% since 1998. A $10,000 investment in October 1998 would have turned into $5.49 million. That is a lot of coffee.

The Bottom Line
It's hard to say where SODA is headed as this point, but investors seem to like it and it does have potential. If you're looking for an interesting small cap, this could be a good place to start your research.

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