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The best business is a royalty on the growth of
others, requiring little capital itself.
Warren Buffett, 1978
I was six years old when I first started to learn the wisdom of
these words (Eugene here). My parents had just decided to
pursue the American dream of owning their own business.
My father was making a modest living as an entry-level engi-
neer at Mobil (before it became ExxonMobil), and my mother
taught math at the local community college.
They had immigrated to the United States from China for their
graduate studies, and over the years had scrimped and saved
every dollar they possibly could. So in 1982 they took their
entire life savings of $150,000 and opened a small electronics
retail store in the local shopping mall called Team Electronics.
Team Electronics operated as a franchise model. My parents
were the franchisees, the owner/operators of their own indi-
vidual unit store. This means that they took their own capital
and built and operated the store. Team Electronics the parent
company was the franchisor and provided the business tem-
plate to my parents: training, suppliers, advertising, etc.
In return for these services, Team Electronics the parent
company would get paid a royalty fee of 6% of all sales. In
return for their hard work, my parents would earn a profit
of whatevers remaining after this royalty fee and all other
operating expenses were deducted.
And what hard work it was. Every waking hour of every
day was spent dealing with retail customers, managing
employees, escalating rents, learning accounting, tracking
inventory, etc. On weekends I would earn 25 cents for
Exponential Compounding on the
Back of Healthy Living
Portfolio Ops
Above Average Odds Investings
Portfolio Ops Jamba Juice (JMBA) March 4, 2013
Briefng Box #001
Action to take: Buy Jamba Juice (JMBA) up to $3.00 per share.
Target: $8.0010.00 per share over 3 to 5 years
Risk: Low
Synopsis: Jamba juice presents an opportunity to purchase a high quality owner operated compound-
ing machine at a mid single digit multiple of YE 2013 owner earnings. With a current enterprise value
of only ~$180m investors can purchase the companys owned store base at a sizable discount to true
value and get a bevy of high margin, annuity-like recurring revenue streams from their franchise and
royalty segments for free.
March 2013 Issue 001
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cleaning the store toilet. On a Friday night after working
until 4 a.m. my parents were too exhausted to safely make
the drive home, so we stayed at the La Quinta motel across
the street. The next morning we had to be back at the store
at 9 a.m. to open. After many years of extremely hard work,
my parents eventually parlayed this rocky start into a suc-
cessful business and realized their American dream.
It didnt take me long to realize that it was a much better busi-
ness proposition to be the franchisor than the franchisee. For
example, in the early years our store might have annual sales of
$500,000. After paying all the expenses, my parents were lucky
to take home $20,000. Based on their initial investment of
$150,000, they were earning a 13% return, which doesnt
sound too horrible. But remember, thats after risking their
entire life savings, both working over 100+ hours per week,
taking on all the risk of purchasing inventory and long-term
lease obligations, not to mention the stress and headaches of
running your own business.
As the franchisor, Team Electronics the parent company would
earn about $30,000 (6% of annual sales of $500,000) from my
parents store. What did they risk to earn this $30,000? Almost
nothing. They had already developed the business model tem-
plate, so all they had to do was provide a few weeks training to
my parents and some occasional support.
What if my parents store had a bad year and only sold
$400,000 of electronics? My parents would pray to break
even, but Team Electronics the franchisor would still earn
$24,000. In other words, to earn this perpetual income
stream of $24,000 to $30,000, Team Electronics the fran-
chisor undertook no risk, and invested almost no capital.
Warren Buffett captured a powerful insight in just a few words:
The best business is a royalty on the growth of others, requir-
ing little capital itself. Indeed! It would be almost 25 years
later when I first read this nugget of wisdom by Buffett. But
then again I didnt really need to, because it was already firmly
etched into my mind from cleaning toilets.
Framing the Opportunity:
The Power of the McDonalds
Franchise Model
Imagine for a moment that you could go back in time and
buy a piece of one of the all-time great businesses in the
world: McDonalds (MCD). Imagine that you could go
back to 1968 when it had less than 1000 restaurant loca-
tions, before its explosive growth to over 33,000 units
today. What makes McDonalds such a great business?
It has an extremely strong brand and mind-share across the
globe. Three times a day at every meal is an opportunity
for McDonalds to generate income from almost the entire
worlds population.
An equally important reason for McDonalds business success
is its franchise business model.
McDonalds gets a continuously recurring stream of income
from every single item of food consumed in each of its 33,000
restaurants around the world, 365 days a year. From every
Coca-Cola that you buy for $1.80, McDonalds (the franchisor
parent company) receives over 20 cents (McDonalds royalty is
12% of sales). Its a business model that is superior even to
Coca-Cola itself.
McDonaldss is truly one of the greatest perpetual annuity
income streams in the world. It is a very low risk, capital-
light business model generating income from the sales of
each franchisee. This franchise model virtually ensures that
McDonalds will always generate a profit, regardless of the
economy or fluctuating food sales. In some ways, its more
akin to a utility in the stability and predictability of its cash
flow generation, versus the ups and downs you would find
in a typical restaurant business.
Lets examine a critical phrase from Buffetts quote, requir-
ing little capital itself.
Given the nature of the franchise model, the vast majority of
McDonalds profits can flow down to the benefit of the share-
holders (via dividends, buybacks, or reinvested for growth),
without impairing its competitive position or future earnings
capacity. This is because the franchisees, like my parents, are
on the hook for all of the negative aspects of the business:
escalating expenses with inflation, large capital expenditures
required just to maintain the physical assets, etc.
All of these negatives consume capital, reduce profits, and make
it difficult to grow the business. Not only do the franchisees
bear the weight of having to continually reinvest capital back
into the business just to keep it running, but they must also
invest all of the capital required to open additional locations.
On the other hand, McDonalds the franchisor is a much
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more attractive business because it is not required to expend
its capital on these negatives. It may choose, however, to rein-
vest a small portion of its profits towards creating a stronger
brand. By doing so, McDonalds can increase sales at existing
locations and encourage growth through franchisees opening
new locations. Thus, the franchise business model creates a
strong virtuous cycle of an ever-growing royalty stream of
cash, requiring little capital itself.
Another important element of the franchise model is the lack
of negative operating leverage. Negative operating leverage is
bad: if sales drop by a few percent, then profits will drop by a
much greater percentage. This is usually due to the burden of
large fixed costs required just to stay open for business.
For an example, lets return to my parents small retail electron-
ics store. In an average year, the store would generate $500,000
in sales, with a gross profit of $200,000 (i.e. 60% cost of goods
sold, or a 40% gross margin). Their fixed costs such as rent, util-
ities, and employees would be about $180,000. So, they would
be left with a net profit of only $20,000. Heaven forbid if they
had a bad year with sales declining 20% down to $400,000.
The 40% gross margin would then yield a gross profit of only
$160,000. But their fixed costs would remain about the same at
$180,000, wiping out all their efforts and resulting in a net loss
of $-20,000. Thats negative operating leverage at work.
Conversely, the franchisor parent company does not suffer
from this business problem. Because it always gets its 6% roy-
alty of sales, it doesnt matter whether sales were $500,000 or
$400,000. At worst, the franchisor would still generate a profit
of $24,000
One last salient point we want to highlight about the superior-
ity of the franchise model is the divergent effect of inflation on
the franchisee versus the franchisor. Buffett alluded to this dur-
ing the 2011 Berkshire Hathaway annual meeting: Ideally to
protect against inflation, you want a royalty on someone elses
sales so you dont have to invest any more capital you make
money as their volume grows.
Rising food costs from inflation generally hurts the franchisees
operating the restaurants because it crimps the profit margins.
Soon, inflation will force the franchisee to raise prices simply
to maintain the same nominal level of profitability. However,
in a perverse twist of economics, what is the franchisees pain
ultimately becomes the franchisors gain. Because the franchi-
sor receives a fixed percentage of the top line food sales, these
price increases will fall directly to the bottom line resulting in
higher profits. In other words, inflationary forces will provide
a perpetual tailwind of rising profits, instead of a continuous
headwind depressing profits.
What if my parents had invested their $150,000 life savings,
not by becoming a franchisee of Team Electronics, but instead
by buying stock in the franchisor McDonalds? What if they
could have bought it in 1968 when McDonalds had just
opened its 1,000th store?
In many ways, this would have been a very low risk invest-
ment. By then McDonalds franchise business model was
already perfected by Ray Kroc, was geographically diverse,
and was very profitable. It did not require any unusual cre-
ative foresight to see the potential runway of growth. Indeed,
the potential should have been self-evident if only they had
fully understood the power of the franchise business model
at that time.
Well, it pains me to say that my parents would now be worth
over $35 million, and I wouldnt have had to clean any toilets.
So the question some of you may be asking is: if McDonalds is
so great, why not buy McDonalds stock now? Well, its already
a $100 billion company. While theres always some room for
growth, the tailwind is not nearly as great as it was 40 years ago.
Also, the stock is not an extremely cheap value, trading at about
18x earnings.
What we want to find is the McDonalds of 1968: a wonder-
ful business with similarly attractive economic characteristics,
set to ride a tidal wave of growth over the coming decade, trad-
ing at a very cheap price today that does not factor in any of its
enormous potential. And that, dear readers, brings us to this
issues recommendation: Jamba Juice (JMBA).
The Jamba Juice Turnaround
Flying low under the radar of
Wall Street, Jamba Juice has
executed a remarkable transfor-
mation over the last four years
to become the ideal franchise
business model. Today it is on
the cusp of becoming a huge
global brand riding the tailwind
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growth trend towards healthy active living.
Despite relatively few stores (780 units) and low geographic
market penetration, Jamba enjoys extremely strong brand
recognition, consistently ranking high in association with a
healthy active lifestyle, similar to brands such as Whole Foods
and Chipotle. The nearest Jamba Juice to my home is several
hours away, yet all of my neighbors have heard of the brand
and associate it with healthy fruit smoothies, even though
theyve never actually been to one of the stores.
While many people recognize the Jamba brand, the stock has
been completely ignored. It is a microcap with a market cap
of only $200 million. As a publicly traded company, Jamba
has had a poor showing for much of its history.
Jamba became public in 2006 as the leading concept store
selling fresh fruit smoothies with ambitious plans for growth.
However, its business model at that time was your typical
capital-intensive fixed-cost restaurant. Over 70% of the
locations were company owned and operated, and less than
30% were franchised. In a misguided attempt to grow 30%
annually, many operational problems immediately began to
surface. Profit margins at the company-owned units declined
from 20% down to below 10%. Rather than grow, the sales
at each store actually declined 8%. Soon, the company post-
ed losses of $150 million (a lesson in the perils of negative
operative leverage). Within two short years, the stock
imploded from $12 to pennies.
In late 2008, Jamba Juice began one of the most remarkable
corporate turnarounds weve ever witnessed. First, to avert
terminal cardiac arrest the company raised $32 million of
cash through a preferred stock issue, bring-
ing some much needed financial stability.
Second, in December 2008 they brought
on board one of the best CEOs weve ever
seen: James White.
Previously, White worked with one of the
greatest executives in the corporate turn-
around game, Jim Kilts who orchestrated
Gillettes spectacular success. Later, White
became a brand builder by developing the
consumer-packaged goods (CPG) business
within Safeway, responsible for brand strat-
egy, innovation, manufacturing, and sales.
Jamba hired White for his skills both as
a corporate turnaround specialist for the near-term, and as a
brand builder to help drive growth for the long-term.
White is a CEO who is not flashy and does not oversell. He
intensely focuses on the Plan, and more importantly, the
solid execution of the plan. Since 2009, this management
team has literally made all the right strategic moves, and exe-
cuted them with remarkable speed and effectiveness. Lets
take a closer look at some of them.
Whites first order of business was to restore the business to
profitability. If a business is not profitable, over time it will
bleed cash and eventually go under. White had to make the
difficult decision, as CEO of a newly public company, to give
up on growing revenues for the sake of improving profitabili-
ty. Wall Street hates declining sales, and while obviously the
correct long-term decision, it can be a painful transition in
the short-term. Whites game plan was to gradually transform
Jamba to become a franchisor, because he recognized it was
such a vastly superior business model.
To make this transformation, Jamba Juice started to sell
many of their poorly performing company-owned stores to
franchisees. These poorly performing Jamba Juice units gen-
erate less than $500,000 in sales (the better performing stores
which Jamba kept generally average more than $700,000 in
sales). By refranchising this store, Jamba would give up these
revenues, but in return it would get $30,000 (6% royalty
fee) each year.
As a franchisor parent company, this $30,000 would be the
new number that Jamba would report to Wall Street as reve-
nue. While much lower, the important point is that this is
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nearly all profit. In the process of this conversion, Jamba
would sell these units to a franchisee for an average of about
$215,000. With this kind of transaction, White simultane-
ously killed two birds with one stone: convert a money losing
asset into a cash generating machine, and immediately raise
some cash to help keep the company afloat.
For the franchisees, they would be getting a Jamba unit a
great price. On average, it takes about $500,000 to build a
new Jamba unit from scratch. So by purchasing this existing
unit from Jamba for $215,000, the franchisee got a great deal
and is off to a good start. Its a mutually beneficial transaction.
It is also encouraging to see that many of these franchisees
that bought the units from Jamba were already current
Jamba franchisees signaling that they believed in the
strength of the brand and the turnaround efforts.
Whites goal is to eventually make the transformation so that
about 80% to 90% of its stores are franchised, and 10% to
20% would remain company-owned (as of today, almost 60%
are franchised). In the depths of 2009, however, over 70%
were company owned. Therefore, White also had to simulta-
neously focus on restoring profitability at the company owned
units. Within a short period of time, White improved same-
store sales, reduced the cost expense of food supplies, reduced
the cost of labor, and dramatically improved profit margins.
If all that wasnt enough, Jamba also desperately needed to
diversify away from smoothies. Selling only smoothies car-
ried many drawbacks. It concentrated the majority of sales
within a narrow window in the afternoon, which caused
operational and throughput inefficiencies. So, the strategy
was to create high-quality food offerings that would help
drive sales throughout the entire day. Jambas first offering
was an award winning steel-cut oatmeal, which was a great
success. Jamba soon expanded to offering wraps, flatbreads,
and kids menu items.
Growing the Brand
Beyond Just Juice
Within three short years, Jamba has transformed its core
business from an unprofitable one-trick pony, into a com-
plete quick service restaurant alternative with an extremely
strong niche brand associated with healthy active living. The
company has also converted to a highly profitable low-risk
capital-light franchise business model. And the really great
news is that Jamba has barely gotten started. Its goal is to
become the leading health and wellness brand in the world.
With the turnaround completed, Jamba can now focus on
growing its brand. Lets look at some of their strategies and
initiatives to illustrate why your editors are so excited about
the companys plans and long-term potential.
Consumer-Packaged Goods: Jamba is extending their brand into
every Wal-Mart, Costco, grocery, and convenience store near
you. They are partnering with other companies to develop
products such as smoothie kits for home, frozen yogurt bars,
trail mix, and energy drinks. These deals are very favorable for
Jamba in that they are similar to the franchise royalty model.
Jamba gets paid a licensing fee of 3% to 5% of every sale.
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Jamba offers their brand name and helps develop the product
and marketing. The partnering companies will be responsible
for all the heavy lifting including production, packaging, and
distribution. In other words, the other companies will carry
the burdens of fixed-costs, capital investments, and manageri-
al responsibilities. Jamba simply sits back and collects checks.
Jambas expenses for developing and growing this operation
are very low basically just a handful of employees.
Sales growth within this nascent segment has been phenome-
nal. Jamba started with home smoothie kits, and sales in 2010
were only a few million dollars. This grew to $50 million in
2011, and is estimated to be $150 million for 2012. Within
a couple more years, this should easily be a $500 million to $1
billion business. Remember that Jamba will get at least 3% to
5% of every sale, and this revenue stream will be almost entire-
ly pure profit. With a market cap of only $200 million, to say
the math is extremely compelling is quite the understatement.
JambaGo: There is a movement afoot to ban sugary soda
like Coke and Pepsi from schools. It is also a public health
concern that kids arent getting enough fruits and vegetables,
and they certainly dont like eating what the school cafeteria
cooks up. So who are the tens of thousands of schools across
the nation going to turn to for a solution? Why Jamba, of
course! In fact, Jamba has developed a standalone unit called
JambaGo specifically to be installed in schools. These units
blend fresh fruit and non-fat milk to create a healthy but
tasty option that kids will actually eat.
The growth has been stunning. JambaGo is a hugely value-
add product that sits squarely at the center of an emerging
and growing secular trend. Jamba started with a few schools
in 2011, and grew to over 400 schools by end of 2012.
Managements stated goal is to have JambaGo in over 1500
schools in 2013. The potential growth runway for this con-
cept alone is mind-boggling. Jamba has not penetrated even
a fraction of a fraction of the addressable market.
In the United States alone, there are over 100,000 K-12
schools, over 100,000 convenience stores, and over 5000
colleges and universities. We estimate that each JambaGo
unit can earn about $2,000 to $3,000 per year for Jamba.
The economics are very favorable, again, because JambaGo
does not require any capital investment from Jamba. The
schools pay for and operate the units. So virtually all of this
revenue will be pure profit.
Even more compelling than the economics, is the branding and
goodwill that JambaGo can build for Jamba. Imagine being in
front of every kid every day for lunch, and providing the best-
tasting menu option available in the cafeteria. No amount of
advertising dollars can buy this kind of brand awareness.
Jamba has many other promising initiatives in development as
well. Management is being highly selective about the loca-
tion of new store units. Prime locations will be in airports,
universities, and business areas like convention centers. Each
store will then have the highest impact and exposure to the
broadest population.
Jamba is developing a smaller format Smoothie Station store
unit for convenience stores and entertainment venues. The
company has also expanded their product offerings into energy
drinks by partnering with Nestle, and into premium hot teas by
acquiring Talbot Teas. Jamba is starting to offer fresh squeezed
juice at their stores to capitalize on the juicing craze. (By the
way, this juice bar upgrade has been extremely impressive: for
an investment cost of $50,000, this upgrade has generated
same-store sales growth of 50% to 100% per store!)
At several locations, Jamba is starting to add drive-thrus in
order to provide faster service and convenience, which will
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especially help drive growth in geographic areas that arent
blessed with California weather year-round. Jamba is also
actively engaging the community, such as developing a rela-
tionship with the school PTA, to promote health and wellness.
The Jockey
This remarkable transformation is why we say say that James
White is hands down one of the best CEOs ever. Years from
now we believe that case studies will be written in business
schools about how White orchestrated Jambas turnaround
and laid the foundation to build an enduring global brand.
This is the kind of management team that you want to partner
with for years to come. Within three short years, they took a
one-dimensional smoothie shop with $150 million in losses,
transitioned this core business to profitability, and simultane-
ously developed multiple new lines of low-risk, capital-light,
high-growth initiatives.
When evaluating management, I usually consider two things.
First, did they do what they said they would do? Check out this
extended video from three years ago when White first started at
Jamba. In clear simple English, he laid out his entire plan and
future strategy. Its almost an hour long, but very well worth it,
as you will come away with a deeper understanding of the com-
pany and how White operates.
So we can now verify that White did indeed execute his plan
in brilliant fashion. Here we have a CEO who ends all of his
presentations with the mantra Promises made will be kept!
How refreshing! Rarely have we seen this level of accountabili-
ty and execution from a CEO before. Heres an episode from
Bloomberg Television where White is a mentor to another
business owner. Notice at the end, his advice boils down
to Its all about the plan.
http://www.bloomberg.com/video/65330968-
bloomberg-the-mentor-james-white-guides-drybar.html
Second, does management have any skin in the game? Do they
own a lot of stock options or restricted stock? Better yet, did
they take their own cash and buy shares in the open market?
When White joined Jamba in Dec 2008 as CEO, he was
granted a special package of 1.5 million stock options. Ad-
ditional options have been granted over the last three years
as incentive compensation and bonuses. More importantly,
White has invested over $250,000 of his own cash buying
stock in the open market at periodic intervals between $1.02
and $2.01 per share. While this may not seem like a lot of
money if youre a Wall Street bank executive, it is a very sig-
nificant purchase relative to Whites after-tax income (annual
salary: $550,000).
How Huge is the
Potential Growth?
Lets take a moment to recap here. We have an opportunity
to buy shares of Jamba Juice, one of the strongest brands in
the country riding on the growing trend towards healthier
eating and living. Jamba has recently completed a remark-
able transformation into one of the greatest business models
of all time: royalty fees from franchising and licensing. The
business possesses highly attractive economics with its diver-
sified set of sticky, stable, high-margin revenue streams.
In addition, future growth requires very little capital invest-
ment, and thus carries little risk. Most importantly, this
is a low risk investment because, unlike other turnaround
stories, we can buy this turnaround after it has already been
completed. Plus, Jamba now has $30 million in cash (over
40 cents per share), zero debt, is cash flow positive, and is
headed by an exceptional CEO and management team.
Now lets consider the future. Jamba is starting from a low
base of 780 store units, and management plans to open about
5070 new franchise units per year. Management has stated
in presentations that it believes the potential number of store
units is 3,700 globally. We believe that this is vastly understated.
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This is the same estimate they used five years ago, and the
Jamba brand has certainly grown stronger since. Of the 3,700
units, about 1,000 are suppose to be international stores. This
is certainly underestimated, as there are plans for 200 units
within South Korea alone.
We dont know exactly how many units the future will hold,
but we are highly confident it is well above 3,700. For frame
of reference, McDonalds has 33,000 locations, Starbucks has
20,000, Burger King has 12,000, and Wendys and Dairy
Queen each have about 6,000 locations.
While Jamba will never have as many locations as McDonalds
or Starbucks, we think that 5,000 to 6,000 units are definitely
possible. That is more than 6x the current footprint. Add
to that, the royalty fees from the consumer-packaged goods
business with multibillion dollar potential, and exponentially
growing revenues from JambaGo that will soon be in thou-
sands of schools, and it should start to become very clear that
the estimates dont even scratch the surface of Jambas ultimate
growth potential.
The great thing about Jambas growth runway is that its huge
potential is not just theoretical. It has been demonstrated and
proven over the last three years.
Why is it Mispriced?
And the best part of all? Wall Street has not taken any notice
yet. This microcap with a checkered past has historically report-
ed losses, and its transformation has been under Wall Streets
radar. As its been working through the turnaround, these losses
have been rapidly declining.
The primary reason why Jambas underlying highly attractive
economic characteristics have remained hidden is that the cor-
porate level general and administration expenses are relatively
high ($38 million) for such a small company. This has been a
deliberate decision because White wants to maintain a strong
platform that can easily scale and accommodate the anticipated
future growth. In addition, this was used to lay the founda-
tion for developing the consumer-packaged goods and
JambaGo businesses.
Your editors love situations like this where the stocks value is
obscured from cursory screens, and some extra effort is required
to peel back the layers to uncover the gem. On this point, we
will quote from the always fantastic letters of East Coast Asset
Managements Chris Begg:
The market is less efficient in its ability to look around the
corners for businesses that are not yet great, but emerging toward
greatness we are focused on seeking knowledge of the causes
that will produce a meaningful inflection point of change on the
economics of the businesses. (Christopher Begg, East Coast
Asset Management, Fourth Quarter 2012 Update)
Exactly! Jamba is rapidly nearing its inflection point. With
Jambas expansion and growing cash flows, it will soon
achieve enough scale where the corporate level expenses
become a much smaller component and no longer mask the
underlying favorable economics of this business. Stay tuned
for future issues where we will examine in-depth the power
of this hidden fulcrum and how it will soon flow through
the underlying business into financial statements.
We expect that when Jamba reports its financials for 2012,
it will likely report a profit for the first time. This will start to
attract attention from the institutions. With the turnaround
recently completed, White has been doing more CNBC inter-
views and emphasizing the companys plans for growth. Your
editors believe that 2013 will be the year when everyone starts
to take notice of Jambas remarkable business.
Just How Cheap is This Stock?
Today, you can buy all of Jambas stores, transformation,
brand name, and future growth for an enterprise value of
$180 million at $2.70 per share (enterprise value means the
price to acquire the entire business: market cap equity plus
debt less cash). For such a strong consumer brand with so
much future potential, that is just dirt-cheap.
By the end of this year 2013, Jamba should be on track to
generate approximately $33 million in EBITDA (or $28 mil-
lion in free cash flow) in a normal year going forward. For a
high quality capital-light business like Jamba with plenty of
growth ahead, it should deserve a valuation multiple of 12x
to 14x EV/EBITDA. Assuming 12x, Jamba would be worth
about $4.90 per share, over 80% upside from todays price.
To put it another way, the current enterprise value stands
at less than 5.5x our estimate of 2013s year-end normalized
EBITDA. Considering the valuation in more absolute terms,
you could buy Jambas entire business and generate a free
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cash flow yield of over 15% by next year. And, this cash flow
will continue to grow for years to come. This is just way too
cheap no matter how you slice it.
Lets look ahead three years including some reasonable estimates
such as 45% same store sales growth, adding 70 new franchise
units per year, and growing the consumer-packaged goods busi-
ness and JambaGo. Jamba should be able to generate pre-tax
cash flows of over $60 million, and should be worth over $8
to $10 per share thats 300% upside in three years. In future
issues we will show in detail how the growth of each of these
segments will translate into rapidly rising cash flows.
Even better, we believe that this huge asymmetric upside carries
relatively little permanent downside risk. Jamba is cash flow
positive, has zero debt, and has $30 million in cash (over 40
cents per share). Jambas turnaround is already complete, the
growth strategies are already proven in the marketplace, and
you couldnt ask for better management. Finally, its high-
margin, capital-light, business model of franchising and
licensing helps ensure that the company can remain
profitable and survive any economic downturns.
Just for kicks, lets consider the future value of just one of
the nascent hidden business segments. The sales of the con-
sumer-packaged goods business is expected to be over
$150 million for 2012, triple the sales compared to the
year prior. For 2013, management has guided for sales
of $250m, but we think that this is severely understated.
We believe that within a couple of years, this segment
should generate about $500 million to $1 billion in sales.
Assuming that Jamba gets a 3% licensing fee (also
likely on the low end) of $500 million, thats about
$15m of almost pure profit. This is a very reasonable
estimate since management has stated a goal of $15m
by 2016. Indeed, it may prove very conservative, given
managements long history of under promising and
over delivering. Given its secular growth and high-
quality capital-light characteristics, the CPG segment
should be valued at least 12x, or $180 million.
You read that right in a couple of years, this one
obscure segment alone will be worth more than the
entire enterprise value of the whole company today!
Your editors could also run through a similar exercise
with the JambaGo segment. Or consider just the royal-
ties from the franchised units. Or we could even casually
mention the fact that these kinds of asset-light cash-flow
generating companies can afford to lever up their balance sheets.
Jamba could easily accommodate some modest debt and buy-
back half its stock, significantly increasing the earnings power
per share. The future possibilities are just enormous.
For an alternative view on just how ridiculously cheap this
company is, we might think about the business as my parents
would, like a small business owner (Eugene here). For $180
million, we would be paying $550,000 for each of the 325
company-owned units. Paying $550,000 for an existing prof-
itable store is a very low price, since it takes about that much
capital upfront to open a new store from scratch. And each of
these stores can generate over $140,000 in cash flow per year
yielding a 25% cash on cash return. Its certainly a much
better business than a Team Electronics store.
Now that by itself would be a fantastic investment opportu-
nity. But dont forget that in addition we would also be
getting some VERY valuable kickers for free: a perpetual 6%
royalty on sales from each of Jambas 450+ franchised stores,
a perpetual 3%5% royalty on sales from licensing the con-
sumer-packaged goods business, plus thousands of dollars per
year from each of the hundreds of JambaGo units. Yes, you
read that correctly: at the current price investors are getting
Less Corporate G&A
Operating Income
Add back D&A
Ebitda
Less maintenance capex
Less dividends for preferreds
FCF or Owner earnings
Total Revenue
JambaGo
Consumer-packaged goods
Franchised stores
Company-owned stores
Revenue streams $Millions Assumptions
325 units, 735k sales per unit (5% SSS growth),
20% 4-wall store ebitda margin
525 units (70 additional units), 525k sales
per unit (5% SSS growth), 6% royalty rate
Management estimate (likely conservative,
assumes 2% licensing fee on 250m in sales)
1500 units, 2.5k per unit
Total capex will be ~10m
8% dividends on remaining preferred stock
No debt interest, $112m of tax NOLs
47
16
5
3
71
-38
Less D&A -10
23
28
+10
33
-5
-0.4
FY 2013 Run-rate Estimates
10 www.portfolioops.com
the most valuable pieces of the growing Jamba enterprise for
essentially less than nothing!
Summary Recommendation
Buy JMBA up to $3.00 per share. Our medium-term
target is $8 to $10 per share over the next three to five
years. This is a long-term holding, and we expect the
business to significantly compound in value over time.
However, this is a microcap stock that can be volatile.
We should always use Mr. Markets irrational emotional
swings to our advantage and be prepared to purchase
even more shares at lower prices should we find ourselves
fortunate enough to be presented with that opportunity.
Lets delve a little deeper into the numbers of Jambas business to try to determine a range of reasonable valuations. We will
also incorporate some of the latest data from Jambas earnings release on March 5.
http://ir.jambajuice.com/phoenix.zhtml?c=192409&p=irol-newsArticle&ID=1792488&highlight=
As your editors had correctly anticipated, Jamba did indeed post a net profit for the very first time since becoming a public
company. While the absolute amount was small ($300,000), we believe this is an important milestone, as more investors will
begin to take notice of this wonderful gem. More importantly, James White and his team continued to make great strides in
growing and transforming the business into an asset-light model focused on franchising and licensing.
Looking into the future a bit, we might ask, What would this kind of company eventually be worth? Lets look at some
comparable comps within the QSR (quick service restaurant) franchise industry.
While these QSR businesses have a varied percentage mix
of company owned units versus franchised units, the table
gives us an approximate range of reasonable values for this
industry. Based on these comps, fair value would range
from 10x to 14x EV/ebitda (trailing metrics), which your
editors would agree is a reasonable valuation for an asset-
light, cash-generating, recession-resistant business.
Jamba operates in a similar industry and possesses all of these
Your Portfolio Ops Team
Ryan OConnor, Editor
Eugene Huang, Co-Editor
Chris Mayer, Managing Editor
Units Mk Cap
(m)
P/E EV/ebitda Net debt/
ebitda
YUM (KFC,
Taco Bell, Pizza
Hut)
39,000 31,000 20.4 11.8 0.8
McDonalds 33,000 98,700 18.4 11.3 1.1
Burger King 12,000 6,700 27.8 14.2 3.9
Dominos 10,000 2,800 26.3 14.1 4.9
Wendys 6,600 2,200 - 9.7 3.1
Appendix/Update
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www.portfolioops.com 11
(continue)
wonderful characteristics, and thus a
similar valuation should be warranted.
Actually, we believe that given Jambas
long growth runway both in the num-
ber of franchise units as well as other
segments like consumer packaged
goods, a valuation towards the higher
end should be deserved. As outlined
in the original write up, we believe
that by the end of this year, Jamba
should be on track to generating a
run-rate EBITDA of approximately
$33 million.
If Jamba trades at a mid-point valua-
tion of 12x EV/ebitda, this would
imply a per share price of $4.92, fully
diluted. This would be an upside of
70% from todays price of ~$2.85 in
the next year or so. If Jambas qualities
and growth were more fully appreciated
by the market and traded at a 14x mul-
tiple, then this would imply share price
of $5.68, or 100% upside from today.
Another interesting takeaway from
the table of QSR comps, is that due to the stable cash-genera-
tive nature of these businesses, they can easily accommodate
some level of debt to maximize the economic returns to equity
shareholders. The amount of debt can range anywhere from 1x
to 5x ebitda. In the future, if Jamba were to take on a conserva-
tive level of debt of $66 million, or 2x ebitda, then it could
easily buyback well over 25% of its shares!
Now that Jamba has been restored to profitability, the cash-generative nature of its business will become more apparent.
With some smart capital allocation, management will have some good options available to maximize value for sharehold-
ers, such as instituting a dividend. If Jamba continues to trade at a very attractive valuation, then a large buyback would
be an excellent use of cash plus serve as a catalyst to unlock value.
FY2012 FY2013 est. Assumptions for 2013 est.
Revenue streams ($ millions)
Company-owned stores 39 47 325 units, 735k sales per
unit (5% SSS growth), 20%
4-wall store ebitda margin
Franchised stores 12 16 525 units (70 additional
units), 525k sales per
unit (5% SSS growth),
6% royalty rate
Consumer-packaged goods 2 5 Management estimate (likely
conservative, assumes 2%
licensing fee on 250m in
sales)
JambaGo (Included in
franchise rev)
3 1500 units, 2.5k per unit
Total Revenue 53 71
Less Corporate G&A -41 -38
Less D&A -11 -10
Operating Income 0.6 23
Add back D&A +11 +10
EBITDA 12 33
Less maintenance capex -3 -5 Total capex will be ~10m
Less dividends for preferreds -2 -0.4 8% dividends on remaining
preferred stock
FCF or Owner earnings 6 28 No debt interest, $112m of
tax NOLs
FY 2013 Run-rate Estimates
Valuation Sensitivity Analysis
Assumes run-rate estimates by end-of-2013: $33m ebitda, $32m cash as of Jan 1,
2013, 87 million shares fully diluted.
Ebitda multiple 10x 11x 12x 13x 14x 15x
EV (m) 330 363 396 429 462 495
Implied mk cap (m) 362 395 428 461 494 527
$ Per diluted share 4.16 4.54 4.92 5.30 5.68 6.06