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Jones Soda Company [JSDA] is one of the most misunderstood companies with one of the most volatile stock prices I've seen in a while.  It is currently trading at around $2.50 per share, or a market cap of $65M per share.  This stock has become a black sheep thanks for the pumping of Jim Cramer and the lack of financial analysis and understanding of Mr. Market.  It is trading for less than 1/10th of it's 52-week high of $32.60 per share. 

Can you believe even now that Mr. Market is silly enough to believe this company is such a bad deal, yet less than 1 year ago he was more than happy to pay 10x the current price?!!?!?  Mr. Market is insane!  Short of bankruptcy and/or fraud, that's ridiculous!

At these low prices, the valuation metric has changed to identify value.  It should not be PE.  PE is inadequate because it only values earnings.  Jones Soda has none in the last year.  There current projected estimated cash outflows looks a lot more like an early stage startup financed from a VC than a relatively stable publicly traded company.  As, Mr. Market continues to misprice this stock too low [versus too high as was the case earlier], it offers a good deal.  

The biggest component to this low-risk high reward play is the balance sheet.  PE ratio is ignorant of the balance sheet.  This small cap is also very unique in that it has an awesome balance sheet relative to it's size.  As of Q4 2007, this company has $17.8M in cash and equivalents and $9.9M in short-term investments, for what should be considered a total cash position of $27.7M.  That's approximately 42% of the stock price.  For every $1 in JSDA's current share price buys you $.42 of cash...  net that out, and the company's effective market cap is really $38M

Maybe that doesn't sound cheap to you.  Let's try to translate the situation into the "beloved" PE terms.  Maybe you think the expansion plan into cans and other products will fail.  Well, even then, at this point JSDA offers a compelling turnaround story.  For the year ended 2005 when JSDA only had canned soda in limited format in Target stores and their primary product was glass bottled soda/drinks, they squeaked out $.06 EPS.  If you assume their existing business generated just $.06 EPS, or $1.3M that would give today's current price a PE of 29 with those numbers.  At a glance, that PE would be well within reason for a small cap company that has the potential to incrementally grow earnings much easier than a large cap due to it's inherent size.  Very much so if the Seattle Seahawks and New Jersey/Brooklyn Nets sponsorships and advertising expense actually pays off over the next few years...

To me, this is a relatively low risk, high reward price, but one that will take some patience.  You can't tell when and if Mr. Market would warm up to this one... so if you are accustomed to Mr. Market telling you what something is worth... don't touch this one. You will need your wits, patience and a strong sense of discipline at all times if you want any chance of a successful investment from this one.

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20% Short Interest, Pending lawsuits over losses related to insider trading. $4 bottles of Soda in a spendthirft market.

Sry I don't buy this stock being worth more than about $6 a share. This is the type of product that was targeted at the "middle class millionare" who is watching his home equity and 401k disapear daily. He's joined his poorer brothers in drinking Minuite Maid.

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When I first looked at this one I figured it for a $4 stock.  They've killed their margin so enormously with their change in direction I wonder if they can remain solvent.
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Let me play devil's advocate.  Ever consider that a large part of the short interest is created by the hedge funds who are helping to fund the lawsuits? 

That would make it really easy for them to convince Joe Blow to give up his shares of a company that's 42% in CASH.

Second of all, the company only bares legal expense, not actual liability for any insider trading convictions.  In my opinion, this insider trading charge is a lot of fluff.  Poor execution and management is something they are guilty of, but unfortunately that is not a crime.

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Dwot, I've wondered the same thing... but I'm not too worried.

I've been thinking about writing this whole thing about slotting fees, but it really gets into a accounting vs economic reality discussion... one in which I think few people would actually care about because it involves a lot of accounting issues.  That's just not glamorous and the average investor on CAPS is not likely to care... 

 

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Another thing is, you can always model out future cash flows.  It helps if you understand the business.  I am really interested in business strategy, and almost everything I've learned says that JSDA has a great strategy... but it has been very poorly executed.  Price point is the only major concern I have... before SBUX went public and was funded by VCs, even it had to come down on the product price points to attract consumers before they raised prices that were successfully passed on to the consumer.
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I've done some modeling on a GAAP basis, and haven't turned translated it into cash flows... but solvency within the next 2 years is not an issue. 

You have to realize that GAAP and a somewhat recent EITF ruling requires certain promotional allowances and slotting fees to be expensed, even if the economic benefit may extend beyond a period of one year.  Thus, the expensed items that eat so much into their gross margin for FY2007 will be significantly less... these type of expenses should only be 10% - 20% of what they were in 2007. Overall gross profit levels should return to the 33% - 35% range.

Jones still is not likely to turn a profit in 2008 given the circumstances... but if the sales and advertising spend go well and the product(s) are a hit with consumers... incremental sales gains beyond that level into 2009 will be very profitable.  But, alas, Mr. Market never looks beyond one year going forward, so who really cares? 

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I think Jones Soda is in a fight for survival...  I will be surprised if they don't end up bankrupt.
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I do admit there is less margin for error... but bankruptcy at this point is a premature conclusion.  Particularly for a business that has executed almost everything wrong that you can think of.  I know strategy, and the majority of the strategy is very solid... and yes it involves heavy expenses up front which is risky. 

Shelf space is one of Coke and Pepsi's biggest competitive advantages...  it's expensive to compete with that, because you have to pay expensive slotting fees just to get your product on the shelf.  That represents high fixed costs and definitely lowers the margin for error.  From a GAAP standpoint, those are recorded as a reduction to net revenue... looking at net revenues at this point is misleading for future projections, but adequate for historical performance.  Once shelving space is acquired, it gives Jones a bit more of a fair playing field, although shelf space usually isn't as visible [product placement makes a huge difference at the retail level; hence retailers practice of charging slotting fees].  If sell-through at that level is adequate enough to cover high fixed slotting fees, retailers will generally require much less than the initial slotting fee payment.  In hindsight, the economics of the situation could dictate prior costs should have been capitalized and would then currently act like non-GAAP assets.  I agree with GAAP though in how they require it to be recorded because it is more conservative and appropriate.  The GAAP recording should not be dependent on future results.  From an analytical standpoint, however, it is at least important to be mindful of the potential discrepency between accounting and economic realities.  Coke and Pepsi pay very little in slotting fees relative to competitors because of their bargaining power. 

If Jones can meet a certain level of sales, it should cover continuing slotting fees, and from a financial modeling perspective you would probably extend out the estimated useful life of the initial slotting fees because the benefit could be extended beyond one year. If not, it is expensed as incurred and will be the doom and gloom situation you've [dwot] already concluded.

Coke expensed out their slotting fees at some retailers a long time ago... same thing with those signs that you see at really old "mom and pop" sub shops... some of those old Coke signs have to be over 25 years old, yet I'm certain all of that was expensed out years ago even though it still adds economic value today.

Jones biggest risks are that the capital requirements are

1) High

and

2) Requires successful level of product sell through [at the gross level].

It is high risk, but it has high reward.  If sales are strong, incremental costs on the back end are relatively low and have a high profit margin on the back end [i.e. good economies of scale]...  That's the same type of economics that drive HANS' growth and the same economics that continue to drive Coke's profitability today. 

At this point for Jones shareholders, sales is the most important metric to watch.... particularly during the seasonal quarters of the business.  Last year they did not have product in stores and/or adequately supported via marketing efforts.  I will be watching very closely at the Q2 and Q3 sales numbers this year... that is probably going to be the biggest signal going forward.  Furthermore, it would alleviate another pressing issue... Wal-mart has a lot of buying power on Jones right now because they make up more than 10% of revenues and it seems Kroger [second largest grocery retailer] is slow in getting its act together with Jones... margins will likely to continue to remain under pressure at least until Jones can more effectively service existing clients.

Another note, some people mention excessive "one time" inventory write downs that would show up next year.  I guess that is somewhat true, but they typically write down inventory every 4 years or so when they do a "major" shake up to their product lines... It's not really "one time" in my opinion, but something that probably wont' happen next year. I noticed some of the new flavors of the "Naturals" line look more appealing and the flavor I tried tasted really good... not like sewage run-off like some of their other flavors in that line.

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