Saturday, November 12, 2005

A Growth Stock? Out of my element…Lessons learned..and more

Jones Soda Co
Ticker: JSDA
Price: $4.88
Market Cap: $105 million
Shares Out: 21.4 million
P/E Ratio: you don’t want to know
2004 Revenue: $27.54 million
2004 Net Income: $1.33million

This is not the typical company we research here at Cheap Stocks. We are not oriented toward growth stocks; we wish were, but we just are not wired that way. We gravitate toward deep value plays, and Jones is far from deep value. So why dedicate valuable Cheap Stocks real estate toward a company trading at more than 100X earnings? Because this company reminds us our greatest investing mistake, Hansen(Ticker: HANS, $67.39).

You may have seen our March 7, 2005 column regarding our Hansen adventure (click on Hansen to see). The short version is that your editor purchased shares in the $3.5 range a few years back, watched the company trade sideways, and below, saw it ultimately hit $10, and sold. Nice gain, right? Fast forward, the now trades at more than $67, and that’s after a 2 for 1 split. Effectively, your not-so-bright Cheap Stocks Editor left more than $60000 on the table, by not holding onto the original 500 shares of Hansen. I know, I know, you should never look back after a gain, but it’s difficult not to. Truth be told, it’s a wonder I held the stock until it hit $10, it’s doubtful I would have ever held it to the current level.

Back to Jones…..
Jones Soda Co sells it sodas (under the Jones Soda Co. and Jones Naturals labels), teas and energy drinks in 41 states, and Canada. You may have seen there distinctive looking bottles sold in supermarkets, at premium prices (in my eyes, anyway) and other stores, these feature interesting flavors, and ever changing labels, submitted by consumers. The company has also made a name for itself at Thanksgiving, selling a soda assortment that includes such flavors as turkey and gravy, and mashed potato (no joke, check it out on their website). I’ve also noticed a growing presence in Target Stores, where Jones sells 12 packs at somewhat inexpensive prices. Inroads into a major chain such as Target make this an intriguing story.

The Fundamentals
It ain’t cheap. There’s no other way to say it. At about 140 times trailing 12 month EPS, 2.8 times sales, and 19 times book value, this company should not be within 10 feet of the words “Cheap Stocks”. But, however, we at Cheap Stocks are warming up to the idea of paying up for rapid growth in certain cases, and this company may fit the bill…..We have to at least be open to the possibility.

Jones 2004 fiscal year sales were $27.45 million, up nearly 37 percent from 2003’s $20.1 million. Net income was $1.33 million in 2004, for a net profit margin of 4.8 percent, up from 2003’s $324 thousand, and 1.6 percent. Through the third quarter of 2005, net sales are $32.4 million, up sharply from $21.1 million for the same period last year. Earnings, however, are down, $720,000 for the first three quarters of 2005, versus $1.245 million for the same period in 2004.

The company does not have much to speak of in the way of assets ($9.7 million in total assets, $303 thousand in cash) nor does it carry much debt either ($116 thousand in LT debt). This explains the high price to book ratio, but also the company’s very high returns on capital and equity (more than 60% for each).

The Risks
Trading at such high multiples (to nearly everything imaginable) it appears that there is a great deal of growth priced into the stock. Still, trading below $5, the stock well off it’s high of about $8. While we are impressed by the company’s exposure in Target, we believe that the agreement expires in 2006, and are not aware of renewal prospects. Finally, the beverage market is extremely competitive, shelf space is difficult to secure, and margins are typically low.

While we don’t currently own Jones, we’ll be following the story, and perhaps looking for an entry point. A continued presence in Target, continued innovation in flavors and packaging, and growing brand recognition would all be pluses for this company. We’d imagine a great deal of price volatility moving forward. Finally, it is conceivable that ultimately, a bigger player takes Jones out.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

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