Imation: Catalysts In Place For Shareholders To Prosper

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 |  About: Imation Corporation (IMN)
by: Alex Shadunsky

One company that has stayed under the radar with the patent market hot is Imation (IMN). The company, with an enterprise value of just $7 million compared to a market cap of $220 million, is valued at almost 0. However, taking a deeper dive into the company reveals that it may have some more value, especially looking at its intellectual property portfolio.

Revenues at the company have continued to decline as the computing world continues switching from traditional storage products such as CDs and DVDs to secure and scalable storage products such as USB flash drives and portable external hard drives. Imation was a pioneer in the traditional storage but has struggled to make the shift over to modern storage products. In turn, revenues have suffered. Despite the downturn in traditional storage, the company has continued to accumulate cash, even though some of it has been used for unworthy acquisitions.

With current assets of $662 million, mostly in cash, accounts receivable, and inventory, and just $374 million in total liabilities, the company is in a solid financial position. According to my estimates, these assets would net out to $220 million for shareholders in a liquidation situation, just about what the market is valuing the company at. However, that estimate values the patents at 0, which may be a bit low, especially looking at recent comparable patent transactions.

At the end of the year the company held 249 patents. Patent transactions have averaged between 100k to $1.2 million a patent. Taking the midpoint of about $600k suggests that IMN's patents are worth about $150 million, or about $4 a share, which would provide significant upside for the stock. But the patents could just as easily be worth less than that, and a transaction in the $200k/patent range that InterDigital (IDCC) just announced with Intel (INTC) would only be worth $50 million or $1.30 a share, providing upside of 23%, or a bit short of a worthy investment in IMN with the after mentioned issues management has been working on.

The catalysts, though, are in place for something to happen. The company is in the midst of a strategic transformation incorporating its five acquisitions from 2011 in its business while building a platform to launch new, differentiated products that carry higher gross margins. The company expects the transformation to help the company to return to growth as it exits 2012 and enters 2013. Gross margins this year are expected to move toward 20%, up from 17.5% in 2011. Operating income for the year should be about flat with 2011's breakeven level, excluding charges. Longer term, Imation is targeting gross margins to exceed 20%, with a goal of operating income in the 4-5% range.

In its Q1 conference call with analysts, management said that it is looking at share repurchases. Mark Lucas, Imation CEO, said that "We are continuing looking at buying back shares. We continue to have an authorization of… 1.2 million shares available to us. We have Board meetings once a quarter, talk about it every quarter and it is definitely high on our radar screen."

The Kodak patent auction, scheduled to take place in early August, may bring patent stocks back in play.

At these prices it seems a bit aggressive to make an investment into Imation based on the current prospects but a change in the direction of the operations or stock price may garner Imation another look with solid catalysts in place.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Thanks for the feedback.