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Investment Ideas SodaStream keeps the fizz going despite squeezed margins

Actress Scarlett Johansson and SodaStream have made headlines lately for the company’s decision to build a factory in the West Bank.

AP

Shareholders in carbonated drink machine company SodaStream International Ltd. are looking for less controversy and more profit to prevent the stock from going flat.

SodaStream shares have fizzled out since the Israel-based company issued a profit warning last month that also coincided with a backlash for its decision to operate a factory in an Israeli settlement on the West Bank.

The company, whose pop machines turn tap water into sparkling water and carbonated soft drinks, is also gaining attention for hiring actress Scarlett Johansson as its pitch person. She has also become embroiled in the political debate.

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While some believe all publicity is good, the market isn't convinced.

SodaStream shares hit a 52-week low of $35.27 (U.S.) on the Nasdaq on Monday and are down about 55 per cent from a high of $77.80 in June. The stock dropped 26 per cent on Jan. 13 alone after the company said 2013 profit would come in lower than expected. It has yet to recover.

"With all of the noise around the company, a little boring wouldn't be bad," said Barclays analyst David Kaplan. About 40 per cent of the shares outstanding are short positions, according to S&P Capital IQ.

Mr. Kaplan has a "buy" on the stock but drastically reduced his price target last week to $55 from $100 citing "credibility issues" after SodaStream said it would miss its annual profit target.

The company reported preliminary adjusted net income of $52.5-million for 2013, below the $65.4-million median estimate of four analysts surveyed by Bloomberg.

The company blamed lower selling prices and higher costs for squeezing margins – issues that it expects to continue into the first half of 2014.

Mr. Kaplan likes the business and believes the stock is "cheap" at its current level. Still, he doesn't see much movement until the company provides more information in its next set of financial results, which are expected later this month.

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Of the 13 analysts that cover the stock, seven recommend it as a "hold," five say "buy" and one rates it a "sell," according to Thomson Reuters I/B/E/S. The consensus price target over the next year is $53.63.

Stifel analyst Jim Duffy has a "sell" and a "fair value" estimate of $34 on the stock, expecting the company to see growth challenges in the United States, an important market.

Canaccord Genuity analyst Scott Van Winkle recently cut his price target $43 from $63, but maintained his "hold" rating. "Robust growth and opportunity are balanced with volatility and forecasting challenges," he says in a recent note.

Mr. Van Winkle says he'll be looking for more updated information on the company's geographic and product sales mix when it reports its latest results.

About half of the company's sales are in Western Europe, another 34 per cent in the Americas and the rest in Eastern Europe, the Middle East and Asia.

Roth Capital Partners analyst Anton Brenner has a "buy" and $55 price target on the stock, believing SodaStream's issues are short-term.

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"We believe that home carbonation will be a major category and we expect SodaStream to remain the global leader in the category," he wrote in a recent note, adding that revenues did increase 26 per cent in the fourth quarter. "We anticipate that sales and income will increase at a significant above-average rate over the next several years."

Michael Bowman, vice-president and portfolio manager at Hamilton-based Wickham Investment Counsel, isn't as convinced the company will go mainstream, calling it a "concept stock." "That's not something I usually invest in," says Mr. Bowman, who doesn't own the stock. "If it went down to $30 I could get interested."

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