No Coke or Pepsi, Cadian Capital Will Make Its Own Soda

According to a 13G filed with the SEC, Cadian Capital Management now owns just over 10% of the outstanding shares of Sodastream International Ltd (NASDAQ:SODA). The fund’s 2 million shares represented an increase from the 1.2 million that it had reported in its 13F filing, which had disclosed many of Cadian’s long equity positions as of the end of June (find other stocks that Cadian owned). Cadian Capital Management is run by Eric Bannasch, who had previously worked at Perry Capital. Sodastream is an Israeli-based manufacturer of carbonation systems, which allow consumers to produce flavored sodas from their own tap water. It went public in November 2010 and has risen 51% since that time, though it is far below the prices it traded at in summer 2011 and has substantially underperformed the S&P 500 over the last year.

Sodastream’s growth as a business has continued, however. Its revenue was up 49% in the second quarter of 2012 compared to the same period last year- breaking the $100 million quarterly sales mark- and its margins only fell slightly so this growth pulled net income up 44% to $10 million. Revenue in the Americas doubled, and that region is closing in on the still-growing European operations to become the company’s top market. Both Sodastream’s starter kits and consumables saw 49% sales growth.

David Shaw

Given how rapidly the company is growing, it is a bit of a surprise to see it trading at a trailing P/E of only 22. Even looking out one year, the forward P/E is 13 based on analyst estimates; the five-year PEG ratio is 0.6. We certainly think that there is a case to be made for sustained strong growth in the business, and Cadian isn’t the only hedge fund who is convinced on that point. Tremblant Capital, managed by Brett Barakett, increased its stake by 66% during the second quarter to a total of 1.1 million shares (see more stock picks from Tremblant Capital) while D.E. Shaw closed June with about 690,000 shares in its own portfolio (research more stocks in D.E. Shaw’s portfolio). However, a number of investors apparently think that Sodastream is a fad, or at least that its price point will limit market penetration: the most recent data showed 58% of the stock’s float held short, with the total number of shares short equaling 12 days worth of volume. Therefore there is strong disagreement in the market about the company’s future prospects.

Sodastream’s closest peer- unfortunately for the company- is probably Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR). Green Mountain Coffee Roasters is down 76% from a year ago as David Einhorn’s short thesis for the stock preceded a sharp decline. 35% of its float is still held short as market watchers expect it to decline further. Revenue and earnings are up, and the trailing P/E is only 10, but it apparently has not satisfied people who worry about its intellectual property issues.

The company can also be compared to Spectrum Brands Holdings, Inc. (NYSE:SPB), which owns lines of household products such as Black & Decker (the tools under that name are sold by a different company), George Foreman, and Toastmaster; Whirlpool Corporation (NYSE:WHR), which owns brands such as KitchenAid; and The Procter & Gamble Company (NYSE:PG). Spectrum Brands and Procter & Gamble both trade at 16 times forward earnings estimates, which represents a premium to the fast-growing Sodastream assuming all three companies end up meeting expectations. It should be noted that both Spectrum Brands and Procter & Gamble also saw high earnings growth in the second quarter compared to the same period a year ago, and that while Spectrum is about the same size as Sodastream in terms of market cap Procter & Gamble is much bigger and also pays a 3.3% dividend yield. If you ignore Green Mountain Coffee Roasters, Whirlpool is apparently the cheapest stock. It trades at trailing and forward P/Es of 11 and 10, respectively; however, its revenue has been down. We’re not convinced that the company can sustain its current business, so we might prefer one that is growing even if it trades at a premium relative to Whirlpool.

If SodaStream continues its growth trajectory, it will prove an excellent “growth at a reasonable price” stock. We do feel a bit cautious seeing how many short sellers have taken a position in the stock, but investors should be aware that Cadian is expressing such confidence in the company.

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