Saturday, November 04, 2006

Taking the Leap: A Deep Value Investor Goes out on a Limb with Jones Soda (JSDA)

When we first published research on Jones Soda (JSDA) we acknowledged the fact that such a company had no business being within ten feet of our value oriented website. We are not too keen on small growth oriented companies trading at 100X earnings. But we are also the first to admit that there are other ways to view the world than our rather narrow view of value. While we were intrigued with Jones at the time of our research, we held out for a year before taking a position.

The Case for Jones
Lets face it, its not about the fundamentals, the company trades nowhere near its net current asset value, does not have tons of cash, does not own a nice tract of land or valuable water rights, nor is it about to delist to avoid the costly provisions of SarbOx—the typical common (and sometimes boring) themes here at Cheap Stocks. Our interest in Jones stems from what we view as a talented, innovative, creative, think-outside-the box management staff that has taken a start up to $34 million in sales in short order. Our frequent trips to Target always involve a stroll down the soda isle, and we were initially surprised to see Jones 12-packs proudly displayed (that arrangement will ultimately come to an end, but we understand that to be Jones decision, not Target’s).

2005 sales were $34.2 million, up 25% from 2004's $27.5 million. However, net income was flat at $1.3 million. For the first 9 months of 2006, sales were $28.5 million, with net income of $2.9 million, for a solid 10% profit margin. We'll have to see what Q4 brings. Make no mistake, this company is not exactly cheap at 60 times earnings, and there's a substantial amount of growth priced in.

While creativity does not necessarily translate into cash, it may when a company is able to create strong brand awareness, and a following. Jones has done this through innovative flavors (who can forget the annual Thanksgiving releases: A limited edition run of flavors including turkey and gravy soda), packaging (the company solicits photos from Jones loyalists to be part of bottle labels), and an engaging and entertaining website.
Call it what you will, but for once, we've stepped out of the value box, and so far its paid off nicely. We'd only hope that Ben Graham would forgive us for our foolishnes.
*The author has 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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