Sodastream International Ltd (SODA), The Coca-Cola Company (KO), PepsiCo, Inc. (PEP): Are the Beverage Giants Worried About This Upstart?

The top two U.S. global beverage giants, The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP), have annual advertising budgets that are larger than Sodastream International Ltd (NASDAQ:SODA)’s annual sales total. However, growth in their unit sales volumes have stalled out, including in the important North American market, as more consumers search for healthier options than the traditional sugary carbonated beverages. While the beverage giants have added fruit juices and premium water to their portfolios, their trademark sodas still account for the vast majority of sales. In contrast, Sodastream International Ltd (NASDAQ:SODA) is fairly agnostic about what consumers drink, as long as they use its machine to make their favorite beverage. So, does this innovator belong in investors’ portfolios?

What’s the value?

While machines that make carbonated beverages have been around since the early 1900’s, they have gained in popularity as consumers desire greater variety in their flavor choices and are more concerned about waste from disposable bottles. Sodastream International Ltd (NASDAQ:SODA) generates most of its profits from its European home base, but its initial public offering in 2010 brought name recognition in the U.S., leading to brisk sales growth. In addition, SodaStream has benefited from the introduction of flavors in partnership with U.S. food giants, like Kraft Food’s Country Time and Campbell Soup’s V8 brands.

In its latest fiscal year, Sodastream International Ltd (NASDAQ:SODA) reported strong financial results, with increases in revenues and adjusted operating income of 51.0% and 55.5%, respectively, versus the prior year. Its sales growth was positively impacted by double-digit increases in sales of its namesake machines and refill containers, as well as gains in its growing roster of syrup flavors. In addition, Sodastream International Ltd (NASDAQ:SODA)’s operating margin reached a five-year high as it continued to drive efficiencies from its global distribution network, which totaled 60,000 store locations in 45 countries as of December 2012.

A bump in the road

Despite the potential threat from Sodastream International Ltd (NASDAQ:SODA)’s do-it-yourself product, the beverage giants seem to be holding their own, with The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) continuing to own the top five best-selling beverage brands in the world. While volume growth rates aren’t what they once were, the companies are finding regional gains in less tapped markets, like the periphery countries of Latin America and Africa. In addition, both companies have been increasing their control of bottling operations in select geographies to better control the distribution of product.

In FY2013, The Coca-Cola Company (NYSE:KO)’s financial results have been pretty lackluster, with declines in revenues and operating income of 1.8% and 2.6%, respectively, compared to the prior-year period. Sales growth was negatively impacted by declines in the company’s key North American and European markets, as well as weakness in its China operations. However, The Coca-Cola Company (NYSE:KO)’s operating margin has held up well, due to cost savings from its global productivity initiatives, including a restructuring of its large German bottling unit. The company also continues to search for greater success in the ready-to-drink tea market, as it builds on its 2012 launch of its new Fuze tea brand.