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 (AMEX: BTN), an Omaha-based manufacturer and distributor of equipment for the movie theatre 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 [click images to enalrge]:
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.
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 this year, it looks to be shaping up into another blockbuster year, with Q1 revenues up 26% and Q2 revenues 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.
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 (NASDAQ: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.
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):
Given our cash position and untapped $20 million credit facility, we continue to be well-positioned to both fund our working capital needs and explore M&A activities. We intend to effectively deploy this capital as we pursue strategic growth opportunities developed through our merger and acquisition strategy and other strategic initiatives. To assist with these efforts we have retained the investment banking firm of George K. Baum & Company.
Our management team remains focused on completing accretive purchases that most effectively leverage and build upon our unique positioning as a leading turnkey provider of digital cinema products and services and our core competencies including strong customer service, global distribution and service networks, and proven skills in providing integration and installation of electronic components, among other items. While Management and the Board continually explore capital deployment strategies, we collectively agree that the time is not right for alternative allocations of capital, including, but not limited to, dividends and stock repurchases.
Further, consider these exchanges from the quarterly conference call (emphasis added):
Robert Routh – Phoenix Partners Group
Few quick questions. The first is your digital numbers are looking good and also the balance sheet is solid. And your cost of equity is your cost of capital right now because the balance sheet is accumulating cash and you would assume that given the low share count, the liquidity isn’t much of an issue, if I understand [ph] as to why you’re ruling out repurchasing shares or doing anything like that at this time to create increased equity leverage so when if you do something, the stock really moves and (inaudible).
Well Robert, this is Kevin. I think what we’ve been talking about is growing this company, both through organic growth and through acquisitions. And to do that, it requires significant amounts of capital potentially to go through that process. So as we’ve talked about in the press release, and Gary mentioned earlier, at this point in time, that’s where the company believes its capital should be allocated.
Eric Barber – Private Investor
Hi, not to continue to beat a dead horse here, but I guess I am just having a problem with the math of this, and the difference between growing and growing value. Now I am all for mergers and acquisitions and growing the company organically but I mean are you saying that you’re seeing potential opportunities out there where the companies are willing to sell to you for 80% of their net asset value or what the 20% earnings at no debt, because that now I am having a difficult time seeing how the Board to make the argument to its shareholders that deploying cash into a firm that can generate that type of value and return to the shareholder for being more valid use of cash from a value perspective, than repurchasing stock or at least leave yourself the ability to repurchase stock at these type of levels?
Well Eric, we’ll certainly pass that on back to our Board of Directors. We welcome the inputs you have. We’ve shared our position and position of the management team as well as the Board of Directors and we would certainly reflect on your comments. I appreciate it.
Eric Barber – Private Investor
But from a mathematical standpoint your position is that you can generate more – that there is more opportunity in terms of value and mergers and acquisitions to buy back from a mathematical standpoint, or just a pure growth standpoint.
Well I don’t have an acquisition that I can tell you right now that that the answer to that Eric.
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.
Disclosure: No position.