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Pepsi isn't going to buy SodaStream – this week. Yet reports that it might pushed the home-soda machine company's shares up 5 per cent on Thursday, even as Pepsi issued categorical denials. Some investors, it appears, had not ever noticed SodaStream's shares (which have doubled since November), its sales (up more than 50 per cent in 2012), or its gross margins (above 50 per cent) until the chatter started. Nor might they have known more than half of SodaStream's revenue comes from canisters and syrups – and everyone loves the razors/blades model.
So surely Pepsi or Coca-Cola will come around to acquiring SodaStream eventually. Coke paid 6 times sales, or $4-billion (U.S.) for Vitamin Water in 2007, for goodness sake. At that valuation SodaStream is worth about $3-billion, more than twice its current market value.
Delirious growth investors may want to take a slightly deeper look at SodaStreams numbers, though. Below the gross margin line, the profit and loss statement is not pretty. The company is expanding its marketing budget so quickly that, despite growing sales fourfold in three years, margins are hardly improving. Profitability is helped a very low tax rate that the company expects to rise. And the balance sheet and cash flow statement are no more encouraging: every dollar the business throws off is going towards working capital and capital expenditure.
Still, SodaStream's management aims to double revenue by 2016 and is building the capacity to do just that. Fair enough. That leaves buyers – Pepsi, Coke or the plain old shareholder – with a single determination to ponder. Is making fizzy drinks at home a fad, or a permanent change in the drinks market? If the former, paying 25 times forward earnings for SodaStream makes sense. If not, better wait for the fizz to subside.
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