SodaStream Bears See 40% Rout Extending on Sales

Photographer: Ariel Jerozolimski/Bloomberg

An employee packages carbon dioxide cylinders at the SodaStream factory in Mishor Adumim, near Jerusalem, Israel. Close

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Photographer: Ariel Jerozolimski/Bloomberg

An employee packages carbon dioxide cylinders at the SodaStream factory in Mishor Adumim, near Jerusalem, Israel.

A record streak of declines has left shares of SodaStream International Ltd. (SODA) trading at the lowest valuation in six months. That’s not cheap enough, according to Barclays Plc and Stifel Financial Corp.

Shares of the Israeli maker of home soda machines plunged 40 percent this year in New York as of yesterday, the worst performance on the Bloomberg Israel-US Equity Index. Twelve weeks of declines left them trading at 14 times estimated earnings, compared with an industry average of 22.

Barclays and Stifel say SodaStream will struggle to achieve its forecast of 15 percent sales growth this year because U.S. retailers have been slow to work off excess inventory. At the same time, SodaStream is offering deep discounts in order to spur sales, eroding margins. The company reports second-quarter earnings July 30.

“What the stock is telling you is that there is fear that the guidance and numbers in consensus estimates are at risk,” Jim Duffy, an analyst with Stifel, said by phone from Denver on July 21. “The guidance SodaStream has provided presumes a favorable swing in growth in the back half of 2014, which given the backdrop of disappointing sales in holiday 2013, seems unlikely.”

Sales this year will increase approximately 15 percent from 2013 while net income should grow about 3 percent, Chief Executive Officer Daniel Birnbaum reiterated in a May 14 earnings call. That would amount to revenue of about $647 million and $43 million in profit.

Analyst Projections

Analysts are forecasting an 11 percent revenue increase to $626 million this year, according to the average estimate of 11 analysts surveyed by Bloomberg. Net income will drop 7.5 percent to $38.9 million, the estimates show.

Nirit Hurwitz, a spokeswoman for Lod, Israel-based SodaStream, declined to comment on the company’s earnings outlook.

Birnbaum said “soft” sales in the Americas would continue in the second quarter, with growth coming from other regions, according to the call with investors in May. The company would likely still have “inventory issues,” Scott Guthrie, general manager for the Americas region, said.

SodaStream shares plunged 26 percent in a single day in January after the company said 2013 earnings would miss forecasts after a lackluster holiday season.

Slow Recovery

Four of 16 analysts covering SodaStream rate the stock a buy, with two, Barclays and Stifel, rating them sell. David Kaplan of Barclays cut his rating on the stock to underweight from the equivalent of neutral on May 22, citing struggling sales in the U.S.

KeyBanc Capital Markets, which has a hold recommendation on the shares, cut its 2014 earnings estimate to $1.83 per share, from $1.98, according to a July 17 report. That compares with a $1.84 average of 10 analyst estimates compiled by Bloomberg.

“The recovery in the company’s U.S. business is not progressing as quickly as expected,” Akshay Jagdale, a New York-based analyst at KeyBanc, wrote in the note.

Even if SodaStream lowers its 2014 earnings guidance, the stock is still attractive because weaker earnings are already priced in, said Whitney Tilson, managing partner of New York-based hedge fund Kase Capital Management.

“I expected that it would take some time for SodaStream to fix its U.S. business, and it has,” Tilson, who owns the stock, wrote in an e-mailed response to questions July 21. “It might take a year or two, but I’m confident that this stock has at least 50-100 percent upside from here.”

Record Decline

SodaStream, which went public in New York in November 2010, has declined 50 percent in the past year and dropped every week for three months, the longest streak on record. It slipped 0.7 percent to $29.40 at 10:41 a.m. in New York. The Bloomberg Israel-U.S. gauge climbed 0.3 percent to 119.34.

Coca-Cola Co.’s entrance into SodaStream’s home carbonation market is also a negative for the stock, said Yousef Abbasi, a market strategist at JonesTrading Institutional Services LLC in New York.

The world’s largest beverage maker increased its stake in Keurig Green Mountain Inc., which is developing a make-your-own, single-service product similar to SodaStream’s, to 16 percent in May, becoming the company’s largest shareholder.

SodaStream benefits from the so-called razor-blade model of retailing where profits rely on customers repeatedly buying complementary products such as carbonation cannisters and flavors. The company’s main problem is that customers haven’t been buying these extra items, forcing management to spend more on marketing to bring in new buyers of its machines, said Stifel’s Duffy.

“Essentially this is a game of putting people in the top of the bucket faster than they’re falling out of the bottom,” he said. “They can’t pull back on that marketing spend to protect margins without risking sales.”

To contact the reporter on this story: Gabrielle Coppola in New York at gcoppola@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net Marie-France Han

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