This Unique $40 Stock Could Be on Its Way to Doubling

Deborah O'Malley's picture

Monday, December 10, 2012 - 7:00am

by Deborah O'Malley

Remember the good 'ole days, when you could buy a can of soda for less than 75 cents? Now, you pay nearly triple this price at most convenience stores. Wouldn't it be nice if there was an alternative?

Thanks to a growing Israeli company called Soda Stream International (Nasdaq: SODA), there is.

Soda Stream is the world's leading maker and distributor of home soda-making systems. Selling more than 10,000 machines a day, the company's products are available in more than 60,000 stores across 45 counties and counting. This coming year, Soda Stream plans to expand into India, Mexico, China and Greece.

The product is so desirable because for a base price of around $80, you can get a machine that quickly turns tap water into delicious carbonated beverages. Collaborating with Kraft Foods Group (Nasdaq: KRFT), Soda Stream currently offers about 150 syrup flavors. These flavored syrups have 66% less sugar, sodium and calories than a typical carbonated beverage, making them a healthier alternative to a regular can of soda. And, of course, you'll be doing your wallet a favor by making your own soda pop, instead of spending around $2 each time you purchase a brand-name can.

As a relatively new company, which went public in November 2010, Soda Stream is still trying to gain consumer brand awareness. To help achieve this goal, the company is undertaking a global advertising campaign.

Recently, Soda Stream introduced its first television commercial, which ended up being banned in the U.K. Regulators there argued the ad denigrated traditional soda companies. Ironically, the ban created more buzz. More than 1.3 million curious viewers have now watched the ad on YouTube, bringing Soda Stream an outpouring of free publicity.

Soda Stream will be paying about $4 million for its next attempt at publicity. The company plans to air a 30-second commercial during the 2013 Super Bowl in February. Soda Stream hopes the Super Bowl ad will generate a true thirst for its product in the United States. Currently, only 28% of all sales are in the United States. This figure means the potential for enormous market penetration in the future, as more North Americans learn about Soda Stream.

Technically, the stock shows strong growth potential.

The company went public in November 2010 at $20 per share, and then quickly climbed to an all-time high near $80 by July 2011. However, upon hitting this peak, shares fell just as quickly, dropping to a low of $27.85 by September 2011.

Around this level, the stock found important support. For the past year-and-a-half, shares have bounced between support and important resistance near $48.20. As a result, the stock has become trapped in a rectangular-shaped consolidation, or holding pattern.

Currently, the stock is testing a shelf of historical resistance dating back to November 2011. If shares can definitively break this resistance level, they could easily pop up to the $48.20 resistance point. This level represents key overhead resistance.

If the stock manages to break $48.20 resistance, then the long-term holding pattern would be bullishly broken. In this case, no nearby historical resistance would be in sight. Shares could feasibly retouch their all-time high near $80. At current levels, this price target means the stock could potentially double in value.

The bullish technical outlook is supported by strong fundamentals. Due to increasing demand, especially in Western Europe and the Asia-Pacific region, analysts expect full-year 2012 revenue will increase 47%, to $423.9 million, from $289 million last year. In the first quarter of 2013, analysts expect international expansion, in regions like India and Greece, will help push revenue up 21.5% to $106.8 million, from $87.9 million in the comparable year-ago quarter.

The earnings outlook is similar. With confidence holiday sales will be strong, analysts expect full-year 2012 earnings will jump 31%, to $2.10 per share, from $1.60 per share last year. For the first quarter of 2013, analysts project earnings will rise 33% to 64 cents per share, from 48 cents per share last year.

In addition to a strong fundamental outlook, the company appears well-valued with a five-year expected PEG (price-to-earnings divided by growth rate) ratio of 0.61. A PEG of 1 or under typically shows fair value.

The company is also cash-rich with $50.7 million in cash and no debt. This financial liquidity should give Soda Stream the freedom to continue marketing its brand and developing new products, like soda syrup flavors.

Risks to consider: Soda Stream is a relatively new company with relatively little consumer brand awareness. The company is aggressively marketing itself through TV advertisements, but these ads may not reach the company's full target market. In addition, a "do-it-yourself" (DIY) soda pop machine may be a fad that could come and go. However, for now, the company seems to be gaining more and more popularity and consumer awareness.

Action to Take --> Buy SODA if shares break above $43.08. Set stop-loss at $38.58, a shelf of support. Set initial price target at $48.12 for a potential 12% gain by mid-2013; longer term, the stock could hit $79.72 for a potential 85% gain.

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This Unique $40 Stock Could Be on Its Way to Doubling

Deborah O'Malley does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.