Jones Soda Popping in 2006

The beverage company could turn in double-digit percentage gains this year.
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The urge to find short-term gains in low-priced stocks is a tempting proposition. However, as

Jones Soda's

(JSDA)

price surge in early April to a 52-week high of $8.60 shows, patience with your holdings can also lead to large gains.

After climbing to a high just under $8 last June, this stock declined and did little until 2006. With that in mind, an update on Jones Soda -- which we recommended that readers take a look at in March 2005 when shares were trading on the over-the-counter bulletin board at $4.73 a share -- is in order now that shares have moved some 50% in 2006.

After a weak first half in 2005, the company is again profitable, and we believe shares are still attractive for purchase by long-term investors. Even so, we are not yet taking any action in the model portfolio, as we will wait for a pullback closer to $7 a share. Shares were recently trading at $8.12.

Jones Soda, which started out as a small beverage company in Seattle, originally marketed itself by having coolers of its soda at sporting events and in fashion stores. The company's odd flavors, such as Green Apple and Berry Lemonade, gave Jones a differentiated product from that of larger carbonated-beverage makers such as

Coca-Cola

(KO) - Get Report

and

Pepsi

(PEP) - Get Report

, and the company soon found itself gaining popularity among skateboarders and other pop-culture groups.

In 2004 and 2005, Jones began to experience a surge in demand as its soda found its way into large retailers such as

Starbucks

and

Target

. Although financial results during this period were uneven, with several advertising and hiring initiatives making it hard for investors and analysts to gauge short-term earnings results, the company's fourth-quarter numbers, reported March 9, tell a compelling story of a stock with plenty of upside to come.

For the fourth quarter, Jones turned in revenue of $8.75 million and pro forma earnings of 2 cents a share. This compares favorably with break-even earnings and revenue of $6.4 million in the year-ago period. Growth in the top line was driven by the company's expansion into Target stores throughout 2005, where it is selling 12-can packs of soda; and by strong sales to its distribution network, which is responsible for getting the product on retailers' shelves. The company was also able to deliver a 90-basis-point year-over-year improvement in gross margins to 36.6%, a solid reflection of strong management execution and a large contributor to its earnings growth.

Improved marketing and new products should help the company's strong top-line growth and profitability continue in 2006 and beyond. On the marketing front, in early March, Jones Soda said it had added Stephen C. Jones to its board of directors. Jones, a 17-year veteran of Coca-Cola, where he served as chief marketing officer during Coca-Cola's expansion years, is a welcome addition to the Jones Soda team, which is still largely made up of the company's founders.

New products were successful in 2005 and should continue to be a driver of sales growth in 2006. According to research from investment house ThinkEquity, Jones Soda's 12-can fridge pack received positive promotion recently, including numerous mentions in Target's weekly circular. Also, the company's licensing pact with Big Sky Brands, which was signed in September 2005, allows Big Sky to manufacture and distribute Jones Soda Flavor Booster hard candy. This deal expands the company's product offerings beyond carbonated drinks, which could enlarge its addressable market and provide for solid sales growth.

Despite the recent surge in Jones Soda's shares, the move higher didn't happen as quickly as we originally anticipated in our March 2005 recommendation, although shares did peak near $8 in June before pulling back sharply. One overhang on the stock's performance was the fact that the stock was traded on the bulletin board, an index that is sometimes referred to as "a wasteland of worthless equities."

Despite management's insistence that its shares were destined for the more-reputable

Nasdaq

, the move didn't occur until late in November 2005. With the stock now listed on a high-profile exchange, we expect institutional investors, such as hedge funds and mutual funds, will consider taking positions. Institutional investors have large buying power, with sufficient funds to buy large enough quantities of a stock to move shares higher.

With the company clearly executing on the sales front and the addition of Stephen Jones to the board of directors, we believe Jones Soda could turn in double-digit percentage gains for investors in 2006.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Jones Soda to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

William Gabrielski is a research analyst at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabrielski welcomes your feedback;

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