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PepsiCo, Inc. (PEP), Sodastream International Ltd (SODA): How This Small Company Plans to Replace The Coca-Cola Company (KO)

Unlike The Coca-Cola Company (NYSE:KO) or PepsiCo, Inc. (NYSE:PEP)Sodastream International Ltd (NASDAQ:SODA) does not manufacture carbonated beverages. Yet, it is probably the major cola-makers’ strongest competitor. The reason? For as little as $99.95, you can turn water into soda in seconds, and more than 10 million Sodastream International Ltd (NASDAQ:SODA) customers have already stopped buying soda in cans and bottles! But can this company actually replace the need to buy The Coca-Cola Company (NYSE:KO) or PepsiCo, Inc. (NYSE:PEP) products?

A great story behind the stock
Before introducing you to the fundamentals of Sodastream International Ltd (NASDAQ:SODA), let me present more details about the company and its product. Its main product, a home-beverage carbonation system, is based on a machine created in 1903 and originally sold in the UK. Sodastream International Ltd (NASDAQ:SODA) machines were very popular during the 80’s in that part of the world. The company was later acquired by Soda-Club, an Israeli company, in 1998.

The real growth story begins when CEO Daniel Birnbaum took power in 2007. Birnbaum was the general manager of Nike Israel from 2003 to 2006, and under his guidance, that business obtained a leading position in the country’s sports industry.  Birnbaum relaunched the SodaStream brand in many markets around 2007 and led it through a successful IPO in 2010. The deal raised $367 million, the eighth-largest offering for an Israeli company on the Nasdaq.

Since then, the company’s market cap has risen to $1.3 billion, and Sodastream International Ltd (NASDAQ:SODA) has consolidated its position as a world leader in home carbonation, present in 45 countries and 60,000 stores (15,000 in the US alone), 7 million active households, and a revenue projection for 2013 of $565 million.

The secret? A great product

Source: SodaStream investor relations, August presentation

SodaStream’s product offers a similar experience to The Coca-Cola Company (NYSE:KO) and other traditional carbonated beverages, and it represents a better bargain. According to the company, you can save up to 70% for sparkling water and up to 30% for carbonated soft drinks. It is also convenient; you won’t have to deal with lugging heavy bottles and six-packs any more.

From the business point of view, by selling the razors (the carbonates system) relatively cheap, and keeping the blades (the flavors) pricey, Sodastream International Ltd (NASDAQ:SODA) effectively manages to lock in its customers and keep margins high.

The company has control of the whole system: it manufactures soda makers (where it has protected its carbonation technique and design with patents), reusable carbonating bottles, CO2 cylinders, and a full-range of flavors from energy to diet products. Let’s see how this reflects in the fundamentals of the company.

Rock-solid fundamentals
Sodastream International Ltd (NASDAQ:SODA) is a genuine growth stock. In the second quarter of 2013, it increased its revenue by 28.5% to $134.4 million from the second quarter of 2012. The company is experiencing similar growth in both its soda maker (up 25%) segment and consumables unit (up 28%). In the U.S. alone, sales increased 42% (90%, excluding Wal-Mart sales).

Since 2009, the company has experienced a 49% compound annual growth rate in its soda-maker unit sales. And according to official projections, if SodaStream manages to keep a 23% CAGR for the next three years, revenue should reach $1 billion by 2016.

Source: SodaStream investor relations, August presentation

The best part is that maintaining a 23% CAGR does not represent a challenge for the company–in fact, it could grow even faster. Just consider that to strengthen its business, SodaStream acquired an Italian distributor last quarter. It is also increasing the number of its gas-exchange locations in the U.S. (so far, more than 13,000 locations), where customers are allowed to exchange spent CO2 cylinders for new ones.

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