Coca-Cola Co. is giving SodaStream International Ltd. (SODA:US) a hand in scaring away short sellers.
Since Coca-Cola agreed Feb. 5 to buy a 10 percent stake in Green Mountain Coffee Roasters Inc. (GMCR:US), a company developing a make-your-own, single-serve product similar to SodaStream’s, short interest on the stock has fallen. It dropped to 22 percent of the Israeli beverage maker’s outstanding shares on Feb. 14 from an 18-month high of 30 percent at the start of the year, according to data compiled by Bloomberg and Markit, a London-based research firm.
The Green Mountain deal helped validate the do-it-yourself beverage market and fueled speculation that PepsiCo Inc. (PEP:US), the world’s second-largest soft-drink maker after Coca-Cola, will make a bid for SodaStream. The stock has started to rebound, climbing 15 percent from a 14-month low (SODA:US) it hit on Feb. 3 after the company released worse-than-forecast preliminary earnings for 2013.
“There is a chance SodaStream can repeat Green Mountain’s success story,” Albert Saporta, the head of research at Makor Capital Ltd. in Ramat Gan, Israel who has a buy rating on the stock, said in a Feb. 12 telephone interview. “If the at-home carbonated beverage market proves to be a substantial market, you win without paying anything for that.”
SodaStream, surged 3.2 percent to $41.85 at 10:49 a.m. in New York, paring its retreat over the past eight months to 42 percent. The selloff has left its valuation at 16.8 times estimated earnings, or 16 percent below the average multiple for companies in the Nasdaq Composite Index, according to data compiled by Bloomberg.
Shares of Lod, Israel-based SodaStream slid the most since 2011 on Jan. 13 after the company said lackluster holiday sales reduced earnings and Chief Executive Officer Daniel Birnbaum said he expects some “headwinds” to extend into this year. SodaStream, whose products are sold in more than 60,000 retail stores in 45 countries, sells devices for making soda at home.
Birnbaum’s outlook overshadowed a Jan. 10 announcement that Hollywood actress Scarlett Johansson would become the face of its new marketing campaign. The agreement attracted criticism of SodaStream’s factory in the West Bank, a territory that Palestinians seek for an independent state. Johansson publicly split from U.K.-based anti-poverty group Oxfam International, which objected to her partnership with SodaStream.
Coca-Cola’s $1.25 billion purchase of the Green Mountain stake shored up confidence in the market for home soda machines, according to Anton Brenner, an analyst at Roth Capital Partners LLC, wrote in a Feb. 7 report. Coca-Cola said it’s working with Green Mountain on the Keurig Cold single-cup beverage brewer to be sold later this year. Green Mountain will make and sell Coca-Cola-branded pods to go with the machine.
PepsiCo Chief Executive Officer Indra Nooyi said on a Feb. 13 conference call that the company sees in-home carbonation as “another distribution channel” for carbonated and sparkling beverages and is “working with multiple people” to be sure it chooses a partner “who we are sure will commercialize” the product.
SodaStream and Pepsi spokesmen declined to comment on the buyout speculation.
“Green Mountain Coffee Roasters is the right partner with a proven track record,” Coca-Cola wrote in an e-mailed statement. “The launch of the cold beverage platform backed by The Coca-Cola Company’s brand leadership represents a game-changing innovation in this category.”
While Pepsi has signaled it’s interested in at-home carbonation, it’s not a given that it will partner with SodaStream, Ali Dibadj, an analyst at Sanford C. Bernstein & Co., said by phone from New York on Feb. 13.
“Pepsi’s taking a bit more measured approach, as it usually does,” Dibadj said. “They have been talking to a few people on this, whether it will be SodaStream or someone else, who knows in the end?”
The Israeli maker of soda machines reported preliminary adjusted net income of $52.5 million for 2013, below the $65.4 million median estimate in a Bloomberg survey of four analysts. The company is scheduled to report earnings Feb. 26.
Speculation that SodaStream will strike a deal with one of the large beverage companies has made betting against the company more risky, said Joseph Altobello, an analyst at Oppenheimer & Co. The company needs to boost sales in stores where its machines are already on the shelves and increase consumer usage, he said.
“Coke’s investment in Green Mountain does lend some credibility to the category, and so that helps,” Altobello, who has a neutral rating on the shares, said by phone on Feb. 11. “This is a U.S. story, and their ability to further penetrate the U.S. marketplace is the reason why you own it.”
‘Matter of Time’
SodaStream still has a lot of “growth potential” that is not reflected in its share price, David Kaplan, an analyst at Barclays Plc, wrote in a Feb. 12 report. He reiterated his overweight rating on the stock. The company will ultimately be successful in expanding in the U.S. as it offers a cheaper way to drink soda than most premium brands, he wrote.
“SodaStream will be eventually bought out by a big beverage producer,” Saporta said. “It’s just a matter of time.”
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