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Ballantyne Strong Inc: Sometimes the Best Investments Are Right in Front of You
Posted by: Frank Voisin (IP Logged)
Date: September 19, 2011 09:02AM
I frequently check stock screeners for companies trading near their net current asset value (NCAV, or Current Assets – Total Liabilities). NCAV isn’t a perfect measure, as it ignores the profitability of the business, its historical returns, and off balance sheet liabilities. Despite this, every so often I find a great opportunity, so I keep going back to the trough looking for more.
Recently, I found Ballantyne Strong Inc (BTN), an Omaha-based manufacturer and distributor of equipment for the movie theater industry. The company trades close to its NCAV, with a P/NCAV value of about 1.16. With a market cap of $50 million, the company has nearly $21 million in cash and no bank debt. Furthermore, the company has been largely profitable over the last decade. This warranted a closer inspection.
Here are the company’s returns over the last decade:
Ballantyne Strong Inc - Historical Returns, 2001 - 2Q 2011
Here we see that BTN’s returns have been a mixed bag, and somewhat unimpressive. Regardless, they have been largely positive and frequently in the double digits, providing little explanation for the company’s discount to book value. Let’s look at revenues and margins.
Ballantyne Strong Inc - Revenues and Margins, 2001 - 2Q 2011
Well, here’s something. The company’s revenues increased 89% last year, and 32% the year before. For the two quarters of results that we’ve seen of this year, it looks to be shaping up into another blockbuster year. First quarter revenues were up 26%, and second quarter revenues were up 15%, year over year.
Whenever I see revenue growth like this, I worry that it is fueled by either discounting or more lenient payment terms. In the chart above, we see that the company’s gross margin has been somewhat steady, indicating we have little reason to worry about discounting. Let’s look at the components of the company’s cash conversion cycle to identify any problems related to converting these sales into cash.
Ballantyne Strong Inc - Cash Conversion Cycle, 2001 - 2Q 2011
I have mixed feelings about this. On one hand, the company should be applauded for dramatically improving its cash conversion cycle, such that in the most recent year it took the company just 0.16 net days to convert sales to cash. On the other hand, it appears the bulk of this improvement is on the backs of its suppliers, who have seen BTN delay payment from an average of 30 days in 2006 to a whopping 100 in 2010. I don’t view this as a sustainable advantage for a small company like BTN (though, companies as large as Dell have been able to achieve this to great effect), so I would expect to see working capital demands increase in the future to support more normal figures.
Let’s turn to the company’s capital structure.
Ballantyne Strong Inc - Capital Structure, 2001 - 2Q 2011
Here we see that the company has had no material debt since 2001, and even at that point it had more cash than debt. Since then, we see a rapidly increasing cash balance that has been sustained in the low $20 million range.
When valuing a company with cash as such a large portion of its capital structure and no debt, the enterprise value (EV = Market Value of Equity + Market Value of Debt – Cash and Equivalents) becomes quite small. In fact, for BTN, the figure is around $29 million. The company generated more than $11 million of EBITDA in the last year, indicating a ridiculously low trailing EV/EBITDA of around 2.5.
Before we jump to conclusions about how cheap this company is, we first have to take a step back and ask whether deducting the cash component is a good decision in this case. Not all cash should be treated as cash that can or will be returned to shareholders. It is easy to look at the company’s historical cash balance and conclude that a purchaser of the entire company (the perspective all investors should use) would only have to spend $29 million net of cash (plus a takeover premium), but I think that would be wrong in this case.
Consider this statement from the company’s quarterly earnings press release (emphasis added):
Quote:Further, consider these exchanges from the quarterly conference call (emphasis added):
Quote:Mr. Barber is absolutely correct. Any acquisition will be a poorer (and riskier) use of shareholder cash than repurchasing BTN’s own shares. The company has ~$21 million in cash and an unused $20 million line of credit at LIBOR + 125bp (1.5% currently). Given that the company’s EBIT/EV yield is around 40%, it seems clear that the company should be aggressively repurchasing shares, even using its line of credit to do so. Unfortunately, this scenario doesn’t seem to be in the cards. In November 2008, the company announced a paltry $1 million share repurchase program. Almost three years later, the company has repurchased just $67,061 worth. Less than 10% used over 3 years. Management had the cash to spend, but clearly isn’t motivated by improving shareholder returns.
Management and the Board are set on carrying out their own vision regardless of its effect on shareholder wealth, potentially even taking on debt to fuel its M&A plans. Given this, and the likelihood for increased working capital demands as the company returns to a more normal cash conversion cycle (thus consuming some of that cash value), I am staying out of it.
What do you think of Ballantyne Strong?
Author Disclosure: No position
Talk to Frank about Ballantyne Strong, Inc
Re Ballantyne Strong Inc Sometimes The Best Investments Are Right In Front Of You
Posted by: soule45 (IP Logged)
Date: September 19, 2011 11:24AM
Hard to argue with your conclusions on BTN. Does not appear to be a shareholder-friendly management.
Re Ballantyne Strong Inc Sometimes the Best Investments Are Right in Front of You
Posted by: eurotrader (IP Logged)
Date: December 26, 2011 10:08AM
well it looks like things have finally changed,
I recommended BTN to all my friends to get
on board.....I believe BTN will come out a winner.