Board: Value Hounds
Hi All, trying to provide a write up on Sodastream that outlines my thoughts on the stock. I don't have a lot of experience with valuation or outlining my thoughts, so appreciate any feedback that is constructive. There is also speculation of some partnering with a large company which has driven the stock up, so potentially missed the boat here, but decided to post anyway for feedback. I have found a number of articles discussing sodastream's valuation, so maybe what I have done is a waste of time.
Here we go.
Sodastream is trading about 40% below its high in 2013 and has some reasonable return on capital, margins, debt, and historic YOY growth. The PE ratio is a bit high, but the metrics mentioned above peaked my interest.
This company is in the market leader in home beverage systems and provides an appliance that allows consumers to create their own soda water, soda, and other flavored drinks. Recently they have partnered with some larger appliance companies which I expect will expand their market penetration. Coca-Cola has also entered into the market which on one hand validates the market, but also means a large competitor may put pressure on Sodastream, but I think management understands the competition
Below is some historical data I have pulled together. My ROIC and taxes are slightly different than Morningstar, which I can't put my finger on, but I think it is close enough.
[See Post for Tables]
Based on the above data I was curious if the reduction in share price has created a potential investment opportunity. The Q413 earnings results are a bit troubling with the reduction in margin, net income and return on capital. The company has chalked this up to poor a poor holiday turn out and a poor decision in reaction to a tough market. Management has appeared to be open about this mistake and mentioned they are correcting and adjusting. They have convinced me that this is an outlier.
Sodastream has created some potentially valuable deals with various big name brands like Samsung, Sun Delight, Whirlpool (Kitchenaid), Kraft, and Ocean Spray. A number of these partnerships are fairly recent. I am curious if the drop in stock price due to poor earnings has not accurately accounted for the future value that these partnerships offer.
Etrade Indicates revenues will increase about 10% per year on average between now and 2017. Yahoo finance predicts about 28% average growth over the next five years.
The major risks I see are the entrance of large players into Sodastreams market that can leverage experience and resources to offer competitive pricing. The other risk, which I am really struggling with is how the production facility in Gaza will be viewed in the future. There is already bad press in the news regarding the facility. I don't know how to account for this, but what I did was increase my discount rate slightly. large Production facility in Gaza?
5 year Growth - As noted above I looked at Etrade and yahoo for growth rates. For my Base Case I assume that the yahoo growth estimate of 28% was outdated and probably too aggressive, so used 18%. For my underperform case I assumed a 10% growth rate which I guess at a bit, but aligns with the Etrade estimate. For the outperform case I assumed that the 28% growth-rate would be realized for the 1st 5 years. In all cases I have assumed terminal growth rate at 3.5% which matches the risk free rate I have assumed.
Taxes - The historical average tax rate has been low, less than 10%. Recent financials indicate 10-12% so for the 1st 5 years I have assumed 10% tax rate with taxes increasing to 35% in year 10 and into perpetuity for all cases.
Cost of Capital - Based on my calcs assuming a risk free rate of 3.5% and a 5.75% risk premium I came up with an initial cost of capital of about 9.6%. I adjusted the risk premium up to increase my discount rate to 10.6% in an attempt to account for the issue of the Gaza production facility. I used the same discount rate for all cases. The average is noted above.
ROIC - I adjust my inputs to come up with an average ROIC over 10 years to match what I think would be reasonable for the base case model. For the outperform case I assume ROIC would be close to the industry average for the beverage industry. I am curious how people calculate ROIC. It seems that generally the formula is ROIC = NOPLAT / (Total Assets + LT Liabilities - Cash - Accounts payable, etc..). I have seen some use the current years NOPLAT divided by last years invested capital. Others use data from the same year. Not sure which is correct, but it seems to me that earnings today are a function of what has been done previously so I would think you would use the former approach. Anyway, in my valuation I tried to look at scenarios where the company had avg. ROIC, below avg, and above avg.
As noted in the above table seems to me the price could fall between 31-70/share. My personal opinion is that the likelihood of the underperform case occurring is low, but I don't have a way to quantify this besides articles that I have read discussion potential upside. Beyond the comments I expect to receive regarding my assumptions or lack explanation of key items I would also like to understand how people would make a decision based on the data presented. My thoughts are that the stock could drop below the current price for the short term but has potential to move close to the $70/share, say $60/share
Appreciate the feedback and thougths.