Microcap Kona Grill: Cash-laden Growth Story (KONA)

Feb. 3.06 | About: Kona Grill, (KONA)

A few weeks ago we wrote about telecom service provider IDT Corp which caught our attention because of a market cap that was over half cash (read the post). Keeping to a similar line of thinking, here are a few words on upscale casual dining chain Kona Grill (NASDAQ:KONA).

Kona is a small company, newly IPO’d, with a market cap near $50 million. Of that 50 million, 27.4 is cash—or about 54% of the market cap. And what about debt you may ask? It’s only $4.22 million. Net it out from the cash and you still have a market cap that’s close to 46% cash.

Kona shares are on sale today, undoubtedly influenced by an Oppenheimer downgrade. At this writing the drop is over 8% since yesterday’s close. The downgrade came following yesterday’s news that CEO and President C. Donald Dempsey will be retiring both from the company and its board. Having served the company only since 2004, and with the recent IPO and big hopes for growth, the announcement causes us to raise an eyebrow—but not to give up.

In our view, the Kona story is not really one about excess cash that might be distributed or put to better use. We see the story as a growth one, and the high cash and low debt make growing a lot easier than it otherwise would be.

Kona is open in only 9 locations today, but has plans for 25% annual store growth. Management has called its expansion pace “disciplined