Citi Begins SodaStream (SODA) at Buy; New Partnerships, Mix Will Drive Rapid Growth

SodaStream (Nasdaq: SODA) is bubbling early as Citigroup initiated coverage on company at Buy and price target of $60.

Citi analyst Wendy Nicholson noted that, despite SodaStream rising 37 percent through 2012 and being the best performer in the beverage segment, at $47 the stock is still well below all-time highs of nearly $80 hit in August 2011.

Key points SodaStream has going for it include:

• New distribution wins - SodaStream has expanded with names like Wal-mart (NYSE: WMT) and Costco (Nasdaq: COST) now carrying the brand. The appeal has been bolstered by an improved flavoring assortment, which includes popular brands like Country Time and Kool-Aid;



• More diverse crowd: from Europe accounting for over 80 percent of sale just five years ago, the region now makes up about 50 percent;



• Higher household penetration rates; and



• Stronger levels of consumption.

Nicholson expects robust growth, albeit slower, over the next few years. Though SodaStream has show rapid growth in sell starter kits to retailers and has garnered a stronger presence in the U.S., she cautions investors that further growth will be a little lumpy as the Company is still in early stages. Her model calls for revenue growth of 20 percent in 2013, from 36 percent in 2012.

On profitability and productivity, Nicholson commented, "While we laud the fact that despite its heavy investment spending, SODA has been able to maintain a fairly steady EBITDA margin year-to-date in 2012, we suspect that over time, as not only its new manufacturing facility in Israel comes on line but also as its product mix shifts from starter kits to consumables, SODA’s profit margins can expand."

Gross margins have been firm at about 54 percent to 55 percent. The Americas segment peaked into positive margins in 2011 and are expected to continue rising as sales of higher-margin flavor packs begin to take hold. Likewise, Nicholson is looking for a downtick in regions like Western Europe, Asia-Pacific, and CMEMA, though those operating margins are expected to remain in the 18 percent to 20 percent range.

Risks to the investment include items like a larger concentration of SodaStream's sales still in Western Europe, the ability of new markets to maintain the enthusiasm, the ability for management to keep up with the rapid growth, and higher levels of spending crimping margins.

Nicholson is currently modeling FY12 EPS of 2.35, FY13 EPS of 2.69, and FY14 EPS of 3.05. The price target is 22x Citi's FY13 EPS outlook.

Shares of SodaStream are up 1.2 percent on the session Friday. Click here for SodaStream's recent quarterly numbers.

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