Wagers against SodaStream International Ltd. (SODA:US), the Israeli maker of home soda machines, are climbing from a two-year low amid concern sales will miss the company’s growth forecast for 2013.
Short interest (SODA:US) on SodaStream was 16.5 percent of shares outstanding on Oct. 30, up from 11.7 percent in June, according to data compiled by Bloomberg and Markit, a London-based research firm. That compares with a 2.7 percent average for companies in the Nasdaq Composite Index. About 89 percent of SodaStream shares available for lending have been borrowed by investors, the first step in a short sale, the data showed.
The carbonated drink maker will need sales growth to outpace analysts’ estimates in order to match the company’s forecast (SODA:US) of a 30 percent annual increase. The fourth quarter has accounted for 32 percent of annual revenue since 2009 and the second half of the year made up 57 percent. Sales will increase to $565.3 million in 2013, trailing the company’s $567.2 million forecast, according to the mean estimate of nine analysts compiled by Bloomberg.
“You would have to expect some slowdown because the retail distribution is becoming more mature in the U.S.,” Michael Kass, a New York-based manager of emerging-market and international stocks at Baron Capital Inc., which oversees $20 billion in assets, said by phone. “It’s reasonable in the short term that it takes a breather,” Kass said of the stock price.
While revenue for the three-month period ending Sept. 30 rose 29 percent to $144.6 million, it trailed the $145.2 million mean estimate of nine analysts compiled by Bloomberg. The company’s sales had beaten forecasts by 9.8 percent on average over the previous 11 quarters, compared with the 1.4 percent mean of similar beverage companies. The stock fell 11 percent on Oct. 30, the biggest drop in 20 months.
The company said last week that 2013 sales will increase about 30 percent to $567.2 million, reiterating a prior forecast (SODA:US). It was the first time this year that SodaStream hasn’t raised its forecast.
“In-line sales generally don’t do it for growth stocks” Philip Terpolilli, an analyst at Longbow Research LLC in Independence, Ohio, said by e-mail on Oct. 30. “Shareholders will no doubt be focused on fourth-quarter results and their performance year over year.”
Forty seven percent of SodaStream’s float, a measure of its tradable shares, have been sold short in bearish bets as of Oct. 15, the second-most among U.S.-traded household durable companies, according to data compiled by Bloomberg. That was more than the 44 percent sold short as of Sept. 30 and 36 percent as of July 31.
“The amount of shares that can be borrowed from lending programs has stayed high,” Alex Brog, a director at Markit in London, said on Nov. 1. “This implies that the long holders have been selling, which has put pressure on short sellers to cover their positions. The recent fall in the absolute level of short interest does not imply an increase in positive sentiment.”
A short sale is one in which stock is borrowed and then sold, with the expectation of profit by repurchasing the shares at a lower price to be returned to the lender. SodaStream’s short-float percentage compares with the 30 percent of Keurig-maker Green Mountain Coffee Roasters Inc. (GMCR:US) and the 1.2 of Starbucks Corp. (SBUX:US)
SodaStream so far faces competition from smaller brands, including the Primo Flavorstation made by Winston-Salem, North Carolina-based Primo Water Corp. (PRMW:US), with a market value of $58.1 million.
It benefits from the so-called razor-blade model of retailing, where profit relies on customers repeatedly buying complementary products such as gas tanks, flavor pouches and coffee pods.
“People don’t understand the business,” David Kaplan, an analyst at Barclays Plc in Tel Aviv who recommends buying the shares, said by phone on Oct. 23. “They are creating a new category of beverage in the United States. They are selling a product whose trends are different from the trends of the traditional soft-drink companies.”
Recent developments could see bigger players enter the market which could further crimp SodaStream’s sales.
Starbucks filed on Sept. 18 an application to register the term Fizzio for a machine that makes beverages, including soft drinks, data from the U.S. Patent and Trademark Office show. The Seattle-based company said in the filing that the Fizzio could be used for other purposes including its restaurants, which might not directly compete with SodaStream initially. Starbucks could grow its soda business into a billion-dollar business, according to Wedbush Securities LLC.
“I look at Starbucks not necessarily as a coffee company but as a global consumer-products company,” Nick Setyan, an analyst at Wedbush in Los Angeles, said by phone on Oct. 22. “Whether it’s ice cream to soda drinks to iced coffee to the evolution of juices, they can take any product, whether they buy it for $50 million or they create it themselves, and turn it into a billion-dollar distribution. They can do it with any product and, frankly, soda is right up their alley.”
Green Mountain’s Keurig unit also filed an application to register a mark for “Karbon,” a product it said would be used with “machines for the production of cold water, soda, still, carbonated and sparkling beverages.”
“I don’t see this as an immediate infringement on SodaStream but could it be down the road? That’s a definite possibility,” Will Slabaugh, an analyst at Stephens Inc., said by phone from Little Rock, Arkansas, on Oct. 22. “Starbucks’ first choice here is to capitalize on their positioning as far as being a premier food-and-beverage company, so selling that product in stores is their first priority.”
The decline in third-quarter gross margin “was primarily attributable to higher percentage of subcontracted manufacturing and the strengthening of the shekel,” the company said in a statement on Oct. 30.
The shekel has gained 5.6 percent in 2013 against the dollar, the most among 31 major currencies tracked by Bloomberg, eroding exporters’ profits. Check Point Software Technologies Ltd., the Israeli maker of network-security gear, said that the shekel’s 3.2 percent appreciation against the dollar in the third quarter hurt results by approximately $3 million, or 1.8 percent of profit.
“It’s easy for the optimists to make long-term assumptions based on the current trajectory and say, ‘Here is the potential in five years,’” said Baron’s Kass. “When in the short term the momentum of those data points is slowing, it’s easy for the pessimists to say, ‘See, it’s reversing’ and the penetration and behavior story is over.”
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