SodaStream International (NASDAQ:SODA): Upgrading To OW As Valuation Has Gone Flat - JPM

J.P. Morgan is upgrading SodaStream International (NASDAQ:SODA) to Overweight from Neutral with a $50 price target (prev. NA).

With the company reporting roughly in-line Q211 earnings and disappointing full year guidance, the stock has taken a major hit, dropping about 48% while the S&P has been up nearly 5% over that same time frame. While the stock has obviously lost momentum, they continue to believe that the short to medium term growth potential for SODA is strong and that their 2H guidance will prove to be too conservative. With the multiple having compressed from roughly 40x down to about 19x, 17x ex-cash, and with guidance that seems overly conservative, the firm thinks the stock is attractive here.

The details:

Growth is still there despite the conservative guidance. Even though SODA simply reiterated their FY11 guidance, which alarmed a number of investors, we continue to believe that SODA is a growth story. We believe the company’s 2H11 guidance is far too conservative as the company implied top line growth of nearly 31% for Q311, but only 10% growth YOY in Q4. Even though SODA faces a tough +59% comp in Q411, we note that their total US door count at this point (assuming no move into mass) has grown by +86%. In the end, we think that SODA's guidance will prove to be too conservative and we expect the test in mass (and a potential full roll-out) to provide upside to Q4 numbers. We are currently forecasting 16% revenue growth for Q4, but think our estimate could be too low.

At 19x our FY12 estimate, 17x after adjusting for cash, the stock is too cheap. With the stock down more than 50% from its high, we believe that stock is clearly much more attractive, especially as we believe there are no material changes to the story. With the rest of our group having re-rated positively since the market’s turn, SODA is just trading at a slight premium to the group.

US door growth is high, and trends continue to be strong at BBBY. We expect US doors to be up almost 100% yoy in Q4, and while the comps get more difficult, we still expect strong growth. Over the past few weeks we have contacted a number of Bed, Bath, and Beyond locations (BBBY locations are about 13% of US doors) to get an update on SodaStream products. Overall, it appears that machine and flavor sales, along with C02 refills continue to be strong, which is very encouraging.

We rate SODA OW. While the LT growth profile is less than the bulls would like to think, the ST results should be better than expected. Establishing a $50 price target for December 2012 based on 21x our 2013 estimate. As management discusses the conservatism baked into their Q4 guidance, we expect the multiple to move up

Notablecalls: SODA was a $80 stock back in the beginning of August. The recent high-flyer got smashed after management failed to raise guidance on its most recent conference call.

So now it's at $35 trading 19x EPS while growing EPS by 30%+. We saw a couple of tier-2 firms pound the table to bits on the way down, with little success.

Now we have a tier-1 firm out saying SODA is not a broken story and that things are going pretty well for them. JPM actually highlights some checks they made and these came back positive.

That carries some more weight. A lot more weight actually. Short interest stands at over 70%. The valuation is bound to adjust at some point.

One to watch. If this one gets going, the shorts will have one hell of a task keeping it down here.

Tape's drek but the lower we open the better chances we have for an outsized bounce in my humble opinion.