Jamba, Inc.(NASDAQ:JMBA) has excellent growth prospects. The company has a very good business model and is armed with strong competitive advantages. However, Jamba's balance sheet is weak and the company faces liquidity risks. The shares seem fairly priced, but will fall hard if the company fails to bring around a turnaround soon.
Jamba runs retail stores that serve fresh squeezed juices and fruit smoothies, and some consumer packaged goods. The company attempts to offer premium quality ingredients and a range of high quality, better-for-you food products. The company has a rich menu of smoothies and provides a range of choices. Jamba's main objective is to become a "Top of Mind Healthy Food and Beverage Brand". The company has made a lot of progress towards achieving that goal. The company acquired Talbott Teas™ in 2012.
Jamba's most important sustainable competitive advantage is its high quality customer service. The company has devoted significant resources to ensure that all its stores offer a superior customer experience. On visiting any of Jamba's locations, one finds engaging and enthusiastic employees. The extra emphasis on customer rapport helps the business generate loyalty. Jamba has established comprehensive standards for customer service and runs a bonus program that rewards stores that achieve their customer service goals.
Another important competitive advantage for the company is its premium smoothie offerings. The smoothies are relatively healthy, and have attracted favorable reviews. The smoothies carry no high fructose corn syrup, no artificial preservatives, and no artificial flavors. Jamba's smoothies are flavorful and use both veggies and fruits.
The company had 774 stores in the US, in January of this year. The company believes there is potential for at least 2700 total stores in the US. The company also offers a franchising opportunity. A major portion of the stores in the US are franchise stores(473 in total). Jamba is also keenly focused on international growth. In January 2013, the company ran 35 stores outside the US. These were located in South Korea, the Philippines, and in Canada. Due to the international appeal of the products of the company, the company expects this segment of its revenues to grow rapidly.
Clearly, the company has barely scratched the surface in terms of opening stores. For instance, there are just 2 stores in the state of Pennsylvania. With good planning and marketing, the company could increase the number of stores multifold.
Due to rough operating performance since inception, the company has registered large amounts of accumulated debt. In addition, the cash situation is scary. The current ratio of the company is at 0.85. The acid-test ratio is at 0.71. Even though the company seems very close to earnings sustained profits, its balance sheet can, in the interim, make its investors very nervous.
The company has no short term or long term borrowings. Despite that, the equity to assets ratio is 0.14. A failure to meet its short term earnings target would cause this ratio to fall even further, and could cause a run on its stock. Any decline in investor sentiment towards the company could make it harder for the company to borrow at cheap rates. The company, currently, has access to a revolving line of credit at one month Libor rate + 3% per annum. If the interest rates were to rise in the market, Jamba could find itself in a tight spot.
It might be wise for the company to issue more stock soon since the company seems fairly priced now. A loss over the next 2 years could slide the stock of Jamba down sharply. A stock issue after the slide down would pinch the shareholders much harder.
The company suffered a loss of 3 cents per share in 2012. Its PE ratio can not be calculated for that reason. The company's revenues have shown no improvement over the last few years. However, the company's net earnings have gotten better each year, due to lower costs. For instance, the company lost 35 cents per share in 2010 and 16 cents per share in 2011. Due to the sharp decreases in losses, and a good business model, the market expects the company to achieve profitability in 2013, and so forth. Based on its growth prospects, the company's current stock price of $14 does seem fair. An EPS of 10 to 14 cents a share in 2013 could make the stock price of Jamba climb even higher.
The biggest risk faced by the company is continuation of losses for the next few years. Such an event may lower the equity significantly. The current ratio of Jamba is unimpressive and further losses would force the company to raise cash. A recession in the next few years, with/without high interest rates can make borrowing money very difficult for smaller companies like Jamba.
Jamba holds a few important competitive advantages. Its smoothies are unique and distinguishable from other companies'. Also, the customer service is high quality. The company does show potential for growth, but it has yet to have a profitable year. The balance sheet reveals an impending liquidity problem and the stock can be very volatile.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.