Dougherty & Co. Keeps SodaStream (SODA) at 'Neutral'; Right-Sizing Now Needed to Attract Investors

Dougherty & Company comments on SodaStream Int'l (Nasdaq: SODA) following preliminary Q3 results released earlier Tuesday. The firm rates SodaStream at Neutral.

Analyst Gregory McKinley said: SODA released preliminary Q3 results that are well below expectations due to poor U.S. performance. SODA expects Q3 revenue to be approximately $125.0 million versus the consensus of $154 million and operating income of $8.5 million versus the consensus of $17 million.

During the Q2 earnings call, FY2014 guidance was taken down to adjust for weak soda maker sales in the U.S. We highlighted risk to SODA's 5% revenue growth guidance, citing holiday season sales comparisons against a year ago period in which excess inventories were built that resulted in de-stocking efforts at retailers throughout 1H2014. In the U.S., SODA has not been able to increase its user base, its current users are active but seem to be favoring carbonated water versus flavors, and promotional activity remains high. Exhibit A below shows a significant year-long declining trend in U.S. Google searches for "SodaStream", down ~40% YOY during Q314. SODA will be re-positioning the brand by highlighting health and wellness attributes of its products (natural sweeteners and reduced sugar content), which we think will require time.

What does this mean for the stock? Pre-tax income attributable to the Americas region was $13.7 million in 2013. If we assume pre-tax income approximates EBITDA in the Americas, significant problems in the U.S. convert this market to a break-even business, EBITDA in the rest of the world grows at a 10% CAGR in 2014 and 2015, and value the rest of the world EBITDA at 8x due to greater visibility from the installed base, higher margins from consumables mix, and lower promotional costs, we impute equity value in the mid twenty dollar range. However, we believe a plan to articulate a rightsized cost structure to harvest this cash flow will be required for the stock to attract value buyers.

For an analyst ratings summary and ratings history on SodaStream International click here. For more ratings news on SodaStream International click here.

SodaStream International closed at $27.57 yesterday.

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