This Could Be February's Best Stock

By Jeremy Bowman Markets Fool.com

SodaStream International(NASDAQ: SODA) blew the market away in 2016 as shares of the DIY soda-maker popped 142%, beating all but two stocks in the S&P 500.

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After a standout year like that, a stock's performance generally moderates, but SodaStream has shown no signs of slowing down -- the company again crushed earnings estimates in its fourth-quarter report. So far this year, the stock has built on last year's momentum, gaining 26% year-to-date and 13% thus far in February. After its earnings report came out on February 15, the stock jumped as much as 8% that day. Let's take a closer look at the details.

Image source: Getty.

Back from the dead

A year ago, the market had basically given up on SodaStream, and the company's push to break into the US soda market had fallen flat. Soda sales slipped and profits crumbled as the company made some key marketing errors during the holiday season in 2013 and was stuck with excess inventory that marred its subsequent results.

In response to that event, as well as falling demand for soda, the company regrouped as a sparkling water company, and with the help of a new, more efficient manufacturing facility it's now stronger than ever.

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Among the highlights of the company's fourth-quarter earnings report was revenue jumping 16.7% to $131.8 million, its second-fastest quarterly sales growth since 2013, which easily beat expectations of $125.4 million (an 11% increase). The bottom-line performance was even more impressive as earnings per share tripled from $0.24 a year ago to $0.71, blowing past the analyst consensus at $0.36.

The performance capped off a year in which revenue increased 14.5% to $476.1 million and net income more than doubled to $44.5 million. Sales growth in the recent quarter was solid around the world, increasing by 18% in Western Europe and 20% in the Americas, the company's two biggest markets.

Making the experts look silly

SodaStream's stock surge has come at the expense of Wall Street analysts, who have consistently underestimated the company's comeback. Below are SodaStream's earnings results in recent quarters compared with earnings estimates.

Quarter Estimated EPS Actual EPS Surprise
Q4 2015 $0.17 $0.24 41%
Q1 2016 $0.11 $0.29 164%
Q2 2016 $0.21 $0.37 76%
Q3 2016 $0.23 $0.69 200%
Q4 2016 $0.36 $0.71 97%

Source: SodaStream quarterly reports

As the chart above makes clear, analysts have utterly failed to anticipate the momentum in SodaStream's recovery. Prior to the fourth-quarter report, analysts were forecasting just $1.95 in EPS for 2017, though the company beat that mark in 2016 on the strength of its last report, finishing 2016 with diluted EPS of $2.07.

The magic of operating leverage

SodaStream's dramatic increase in profits on a relatively modest increase in revenue can be attributed in part to the operating leverage in the company's razor-and-blade business model as the company makes a higher margin on sales of consumables like CO2 refills and flavors. As its installed base of users grows, so does its sales of consumables, and therefore a higher profit margin follows.

Image source: The Motley Fool.

For 2017, SodaStream's guidance was conservative, calling for a revenue increase of high-single digits in constant currency, or mid-single digits accounting for the stronger dollar. It sees that sales increase leading to a 30% increase in operating income in constant currency, or low teens on a reported basis. In other words, earnings per share should improve to at least $2.30 this year, though growth could be much stronger if the company beats its own forecasts again. That gives the stock a very modest P/E ratio of about 20 based on this year's earnings, which indicates that the market believes last year's growth to be a fluke rather than evidence of renewed strength. At this time last year, SodaStream had projected flat revenue growth for 2016 and a decline in net income, which woefully underestimated its own turnaround.

Investors shouldn't be surprised if SodaStream's guidance once again proves too conservative. The stock has already gained 13% this month, and following most of its recent earnings beats, its bullish momentum continued. It's also ridden the market's post-election gains, as it's up 51% over the last three months.

Given that momentum, the strong earnings beat, low valuation, and likelihood of analyst upgrades following the last report, SodaStream stock could easily finish February up 20% or more, paving the way for another year of strong gains.

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Jeremy Bowman owns shares of SodaStream. The Motley Fool owns shares of SodaStream. The Motley Fool has a disclosure policy.