Benzinga's Value Investor Report On Jamba Juice (JMBA)

Jamba Inc. JMBA is a value investment in which you can own shares of a true growth stock with about half of your investment in cash. This report will analyze the unique circumstances of a relatively unnoticed stock that might provide risk-averse investors with an opportunity to participate in the growth phase of a corporate turnaround story. This report was first published to subscribers to Benzinga’s Value Investor on March 28, 2011, a new premium newsletter which can be found here.

Background Here are some relevant stats about Jamba: ·      active lifestyle food & beverage company ·      presence in 23 states (footnote #2) ·      concentrated on west coast (California was 83% of 2010 business) ^{(footnote #2)} ·      100 million customer visits annually (footnote #²⁾ ·      1,150 Facebook fans per store ^{(footnote #3)}

·      national brand recognition for Jamba is 41% (higher than Naked or Odwalla) (footnote #¹⁾ ·      #1 top-of-mind smoothie brand in the U.S. ^{(footnote #1)} ·      expects to expand to over 1,100 units from current 740 units (footnote #³⁾ ·      expects to expand in eastern U.S. (footnote #²⁾ ·      expects license revenue to triple in 2011 (from $400k to $1.2M) (footnote #²⁾ ·      expects 50-70 store openings in 2011, mostly franchise units ^{(footnote #2)} ·      expects capital expenditures to be $9-10M for 2011 (including expenditures for company-owned store openings in California) ^{(footnote #2)} Jamba had a few rough years prior to 2009. Due to management problems during 2006-2008, while Jamba’s was under acquisition by Services Acquisition Corporation, Jamba’s stock fell from $10 to $0.40 on concerns that management would drive the company into the ground. The stock also fell as the cash-intensive, non-franchised business model continuously drained resources from Jamba’s balance sheet for building new stores, allowing for only tiny returns to shareholders. However, a new executive team took control of the company in early 2009, led by CEO James White. During the past two years, White and his team have completely settled the legal issues of Services Acquisition and overhauled Jamba from a run-of-the-mill smoothie shop into a turnaround story that is, today, an interesting value investment opportunity. To summarize White’s performance in one sentence: since White’s inception, Jamba stock has gained over 300%. To provide a bit more detail, it is clear that White has taken his promises to shareholders seriously. For the first time since the changeover from Services Acquisition, Jamba executives are delivering on their commitments: commercialized deals with Nestlé, the opening of a store in South Korea, school lunch program campaigns, Parent-Teacher Association cooperation, WNBA relationships, introduction of Jamba products for grocery stores, same-store sales target achievement, drastic reduction of expenses, and the refranchising of over 150 Jamba stores. If 2009-2010 is any indication of future performance, it would seem as though the period of management underperformance at Jamba might finally be over, allowing investors to benefit from the accelerating growth of a financially stable franchise. 40% Cash Investment About 40% of Jamba stock is pure cash. The company has no debt, all legal expenses with Services Acquisition are completely paid, and the stock price has fallen by over a third since its 2010 highs, leaving plenty of upside for the stock. The most rudimentary analysis of Jamba – calculating its fire-sale price – shows that this company is a relatively safe investment. By adding cash and equivalents, discounting receivables and inventories by 50%, subtracting payables, and subtracting debt, liquidated Jamba is worth $58 million, or 40% of its $144 million market capitalization. Again, $2.21 Jamba stock is worth about $0.88 liquidated. Rarely do value investors have the opportunity to invest in a true growth stock with about half of their investment in cash. Jamba stock is currently selling for 0.5x sales. Competitors like Starbucks sell for 2.3x sales, Caribou Coffee for 0.7x sales, and Einstein for 0.6x sales. Although fairly priced on a price/sales metric, if Jamba’s sales rise even modestly during 2011, investors could see relatively large gains in share price. Remember that every $0.01 of profit for investors at current stock levels is equivalent to a 0.4% annualized yield. Why It's So Cheap The main reason for Jamba’s cheap stock price is the former debacle with Services Acquisition Corporation, as discussed earlier. Another reason for Jamba’s relatively cheap share price is due to poor analyst coverage and low institutional interest in the stock. Indeed, despite 13 independent research providers who are registered for Jamba, only three analysts bothered to show up for Jamba’s Q4 2010 conference call: 1.     Peter Mahon of Dougherty & Company 2.     Conrad Lyon of B. Riley & Company 3.     Kurt Frederick of Wedbush Securities Finally, not only do very few analysts follow the stock, the share price is below the $5 threshold that deters many mutual funds and institutional investors. Value investors appreciate under-the-radar stocks: those with little attention from mainstream analysts. Extra Store Hours And A Brand Identity For Free Jamba is moving from a smoothie shop to an entire lifestyle brand identity, and almost none of this transition is priced into the stock. Jamba has added sandwiches, grab-and-go lunch food, coffee, and hot breakfast foods to its menu. It is also rolling-out an expanded breakfast menu (for early-morning business), and a frozen yogurt menu (for late-evening business) by the end of 2011. As word spreads that Jamba shops have real food throughout the day – not just smoothies anymore – Jamba will benefit from several hours of effectively new traffic per day in 2011. When Value Investing Meets Growth Momentum Last year, Jamba finalized litigation with former managers and the repair of the company from an asset-intensive, non-franchised model to an asset-light, franchised model. This year, positive same-store sales (“comps”) and partnerships with Nestle; and school lunch programs will allow early investors to benefit from the "growth" phase of Jamba. Jamba is currently selling just over twice its liquidation value. The current stock price reflects low institutional interest, poor analyst coverage, and investor caution due to the former management’s shortcomings. However, Jamba management has delivered on their promises for over two years, and comps and profitability are starting to turn around, especially as the new franchises begin to generate revenue. The company also just announced positive Q4 2010 comps: Jamba’s first positive comps announcement since 2007. At the moment, Jamba is priced like a value investment even as it enters the growth phase. Gasp! Management Actually Delivering On Promises ·      comps for 2010 were -2.3% (0 to -3% were promised) ^{(footnote #2)} ·      positive comps in Q4 2010 (as promised) ^{(footnote #2)} ·      the first 10 weeks of 2011 are showing positive comps (as promised) ^{(footnote #2)} ·      expanded into first international market: South Korean airport (as promised) ·      completed nine licensing agreements and, to date, commercialized seven ^{(footnote #2)} ·      store-level margins for 2010 were 15% (15-17% promised) ^{(footnote #2)} ·      general and administrative expenses (G&A) reduced by 8% (8 to 10% promised) (footnote #²⁾ Catalysts For A Higher Share Price 1. The first catalyst for higher Jamba share prices is sales growth momentum. Jamba has only reported one fiscal quarter of positive comps since 2007, and that quarter was the most recent quarter. Going forward, management is guiding positive comps of 2-4% for the remainder of 2011. If Jamba’s comps continue to grow positively for the first time since the three-year management overhaul, the stock will likely gain analyst coverage and interest from growth investors, and recognition as the number of Jamba locations rises from 740 to over 1,100.³ (Indeed, a deal has already been signed for 41 new stores in 2011.)³ Brand recognition through school partnerships and grocery store sales will also expand in the upcoming months, and new breakfast menu items will directly improve sales and customer loyalty. Management has promised expansion to another country during 2011 (most likely Canada, as the company has a letter of intent for 125 stores there). 2. Jamba is a cash-rich, debt-free takeover possibility. With Jamba’s low market capitalization of just $133M, rumors have already started circulating that Starbucks might put its $2B of cash to use for the benefit of Jamba’s shareholders. Rebuttals Q: What is going on with that Jamba director Andrew R. Heyer selling so much stock? A: Great question. SEC filings under Heyer’s name show over 76 transactions of Jamba stock during the past 12 months, including sales of over 774k shares. What it going on with this insider? Is this a red flag? (Stay tuned for more on this topic in the next Jamba report. I will be personally following-up on this question and will include my answer in the next Jamba report!) Q: Why did Canba investments sell 46% of their stake in Jamba in early 2010? And while we’re at it, why did the CEO, President of Store Operations, and the Chief Marketing Officer each sell over a fifth of their Jamba stock last week? A: Here are the details: ·      Canba Investments sold 46% of its Jamba stock in May 2010 at $2.71/share.
Canba now owns $337k of Jamba stock. ·      CEO James White sold 19% of his Jamba stock last week at $2.01 for $49k.
White now owns $206k of Jamba stock. ·      President of Store Operations Bruce Schroder sold 43% of his Jamba stock last week at $2.01 for $11k.
Schroder now owns $15k of Jamba stock. ·      Chief Marketing Officer Susan Shields sold 35% of her Jamba stock last week at $2.01 for $11k.
Shields now owns $20k of Jamba stock. Regarding Canba Investments, investors know that this firm owned 8M shares of common stock in December 2009. ^{(footnote #4)} That is now down to 166k. The drastic reduction in Canba's stake is a legitimate concern among investors. (Stay tuned for more on this topic in the next Jamba report. I will be personally following-up on this question and will include my answer in the next Jamba report!) Nevertheless, CEO other insider sales are probably not a significant concern. White, who earned a total salary of $695k during 2009, ^{(footnote #4)} currently owns only $206k of Jamba stock. Yes, and his employment contract does expire in December 2011. (footnote #⁴⁾ Understandably, investors might be wondering why White sold 19% of his Jamba stock last week. The answer is simple. While it is true that White only owns a small amount of Jamba stock, he still holds a large amount of options: good for 1.5M shares of stock at $0.60/share. As of December 2009, White had exercised none of those options, even though 375k had vested and were exercisable. Although investors are still awaiting the 14A form to show an update about 2010 (this form is likely to be released on April 1^st), it would seem as though White simply sold some stock last week for some extra cash. Sure, he owns only $206k of outright stock, but he still holds around $3M of Jamba stock through his options. Regarding Schroder’s $15k of Jamba stock and Shields’ $20k of Jamba stock, there is no easy answer for these two employees. However, given the relatively small dollar amounts of these holdings, and given that these personnel are not company executives, most investors would not be too concerned about these March 2011 sales. Q: Rising commodity prices for dairy and fruit will destroy Jamba’s profitability. A: Two analysts already asked this question on Jamba’s last conference call. Jamba management answered these questions by noting that they have already hedged their food prices through summer 2011; fall 2011 will not likely have significant adverse effects on their profit margins; and food costs will be closely watched and hedged to achieve the promised profit margins. Q: Nuclear radiation from Japan and war in the middle east will destroy Jamba. A: OK, no investment is apocalypse-proof. Conclusion Jamba is a unique opportunity to be a part of a turnaround story at the very beginning of a company’s sales growth phase. Effective downside risk on the stock is 40%, as that price would equal the approximate liquidation value of the company. Very few analysts cover the stock, average bid/ask spread is only $0.01, its shares are below the $5 threshold necessary for institutional ownership, and potential upside is relatively high versus the downside risk. Management has consistently delivered on promises for over two years, and the upcoming year’s comps are expected to be positive for the first time since 2007. Jamba is already commercializing significant international and domestic expansion projects, and the establishment of the Jamba brand is starting in schools and grocery stores around the nation. Whether the company is a debt-free takeover candidate or a growth-phase investment, both possibilities will be rewarding to the prudent investor. Some lingering doubts about the reduction of Heyer and Canba Investments’ stakes in the company do remain, but these issues will be addressed in the next report. I also hope to have some channel check data points about Jamba, as well as greater insight into the valuation possibilities for this stock. Stay tuned for more. Conduct your own due diligence regarding all securities and consult a certified advisor for personalized financial advice. Important note: A member of the Benzinga Value Investor Team strategy team owns 5,000 shares of Jamba Inc. at an average price of $2.18. Other than this long-term investment, Benzinga has received no form of compensation – financial, in-kind, direct, indirect, or otherwise – for this report. Footnote 1: Synovate eNation Omnibus, Jan 2011, n=1,988 Footnote 2: Q4 2010 Jamba conference call http://bit.ly/eWfNbR Footnote 3: Q4 2010 Jamba conference call slides http://bit.ly/exKCZM Footnote 4: Jamba Form DEF 14A filed 4/1/2011 http://bit.ly/ik6sAP