Wednesday, June 27, 2007

Jones Soda (NASDAQ:JSDA): Time to bottom fish?

- Piper Jaffray comments on Jones Soda (NASDAQ:JSDA) after the co announced an exclusive agreement granting them rights to the ingredient PHARMA GABA(TM), which they refer to as "Gaba."

Overall, the firm views this announcement as an incrementally positive. The highergross margin afforded energy drink sales should, in theory, provide Jones Soda with upside potential beyond this year. For example, they would expect theenhanced energy drink category to generate an approximate 60% gross margin, which compares to the core (i.e. bottle DSD and DTR sales) approximate 35% gross margin and the concentrate (i.e. cans, CSD) approximate 85% gross margin.

They expect the company to rollout the "Gaba" enhanced energy line of branded beverages through its distribution, or DSD, network to certain markets as early as the end of this year. Firm anticipates a National rollout, also through the DSD network, next year.

PJ's $31 price target is 68x their 2008 earnings estimate, a premium to the company's 50% growth rate but in line with the 36x-106x four-year trading range. Alternatively, the price target is 12x 2008 revenue estimate. Reiterates Outperform rating on JSDA shares.

Notablecalls: It's fairly quiet out there this AM. I couldn't help to notice PJ still has a $31 target on JSDA, implying hefty upside to current $13 stock price. The stock has been crushed lately, partly because of lower than expected results reported in May and also due to the disappointment at SBUX. The price has been more than halved since mid-April.

Note that ThinkEquity upgraded their rating on JSDA to Buy from Accumulate on June 18 saying they believe the news that Starbucks would stop offering Jones Soda at the end of June has created a buying opportunity as the shares have sold off substantially. Firm believes sales at Starbucks were a very small percentage of bottled soda sales and, more importantly, will have no impact on the rollout of Jones Pure Cane Soda in cans.

Jones Pure Cane Soda in cans is now on track to be on the shelves by the Fourth of July at the long list of retail locations the company announced last March. ThinkEquity believes sales growth will reaccelerate in Q2 an Q3 as retailers using just-in-time inventory systems begin to re-order.

Despite some setbacks, and with the potential for more growing pains, the firm believes new products and substantially larger retail distribution (with more to come) provide Jones Soda with the opportunity to gain share of very large markets and earn rising returns on its investment. Think's target on JSDA stands at $20.

Even here at $13 the stock's not cheap. Yet, considering the growth and opportunity for expansion, I think JSDA is starting to look increasingly interesting. The chart continues to look omnious but I suspect a n-t bottom is $1 away. I would not be surprised to see ThinkEquity come out and up their rating to Strong Buy as the shares are down another $3 points since their June 18 upgrade.

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