Turnaround Hedge Fund Manager is Looking to Hit a Home Run with This Stock

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Lloyd Khaner is the general partner of Khaner Capital, a long/short value-focused hedge fund. At the 8th Annual Value Investing Congress last week, Khaner pitched his latest turnaround idea: Jamba (NASDAQ: JMBA), which owns and franchises Jamba Juice stores.

Jamba’s product is great tasting and moderately healthy, but the company is more than just a juice store; as it also sells both snacks and food. Key food costs for the company are fruits like blueberries and strawberries. Khaner views this as an edge over restaurant competitors who are dealing with inflated corn, beef, and chicken costs.

The company also has a number of other growth initiatives. Jamba’s self-serve unit, Jamba Go, plans to have 400-500 units in public schools across the U.S. by the end of this year, with currently only 90 Jamba Go units open. Jamba also launched ‘at home’ smoothies a couple of months ago. The other growth opportunity Jamba is working on is a consumer packaged goods platform that would allow Jamba to sell products to retailers.

The next stage of growth is to target 3,700 units worldwide with 70% franchised; as well as expanding Jamba Go units into hospitals and other venues, with 1,500 total units in the market by the end of 2013.

Key issues for the company a couple years ago were poor management and overexpansion. Since then, the Jamba has a new management team with turnaround experience. Overexpansion worries included the use of short-term debt to fund the company; Jamba has since eliminated its long-term debt and built cash on hand to over $28 million.

Competition includes big-name fast food chain McDonald’s (NYSE: MCD), which entered the smoothie market earlier this year. Also, coffee giant Starbucks (NASDAQ: SBUX) bought Evolution Fresh last year, which propelled it into the smoothie market as well. Starbucks paid $30 million for the company and plans to offer Evolution Fresh juices in its shops and through other retail stores. Starbucks recently announced plans to open a California facility that will increase its production and distribution capacity for its Evolution Fresh brand. The new facility will allow the Starbucks to roll out Evolution Fresh products on the West Coast and support eastward expansion.

Earlier this year, McDonald’s announced it was going to add smoothies to its menu, although they are puree-based. McDonald’s is not expected to take too much of a share from the real-fruit smoothie market that Jamba currently operates in. McDonald’s vast offerings give it little specialty, unlike those of Jamba. However, the company has locations all over the world and can easily gain market share in locations where there is no Jamba Juice available.

The big plus with McDonald’s and Starbucks entering the market is that they serve as free advertising for the entire industry. Jamba does not spend a lot on marketing, but in 2013 the company is expected to roll out a more aggressive strategy.

Other companies offering smoothies include Dunkin Donuts (NASDAQ: DNKN) and Burger King (NYSE: BKW). Burger King completed an overhaul of its menu earlier this year, adding a variety of drink products. Much like McDonald’s, Burger King has a vast menu offering and is known for fast food. As a result, we do not see a large number of customers trading in the higher-quality smoothies of Jamba Juice for lower-end competitors. The threat that Burger King and McDonald’s pose is being low-cost leaders, giving them the ability to offer their smoothies much cheaper, to the point that quality is less of a factor.

Dunkin started offering smoothies in 2006, and has started a recent expansion plan to gain visibility in the Western part of the country. Dunkin is up only 3% since its mid-2011 IPO, but still has strong expected growth. The company trades at a P/E of 57, driven by its expansion prospects, particularly abroad.

Like Khaner, we believe that Jamba continues to have the best prospects in the smoothie market and is an interesting turnaround opportunity. It appears that notable investor Chuck Royce agrees. Royce owned 2.8 million shares at the end of 2Q—this was over 4% of Royce’s 13F portfolio. Khaner views Jamba as a 3-year turnaround, with valuation metrics on the high side given the company has been under-earning recently. In 2015, Khaner projects EPS of $0.50 with a 15x multiple, for a $7.00 stock price by the middle part of this decade.

This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of McDonald's and Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Burger King Worldwide, McDonald's, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus