Monday, November 9, 2009


Imation (IMN) is a 1996 spin-off of the innovative 3M Company (MMM) that produces storage media from DVDs to backup tapes. It owns the #1 brand/sales position in many of the segments in which it competes. Unfortunately, it doesn't generate returns on equity anywhere near 3M, but on the other hand it doesn't trade at a massive premium to its book value either. Imation has equity of over $900 million but trades for just over $300 million.

With some noted exceptions, companies trading with such low price to book ratios are not likely to be profitable or they wouldn't trade at such low levels. Imation is no anomaly in this regard. Due to various restructuring, pension, asset impairment and litigation charges, along with the current recession, Imation hasn't been profitable for the better part of three years. But last quarter, even including the charges, Imation managed to eek out a small profit, which could suggest they are making progress in aligning costs with revenues.

The company's storage solutions are offered to large customers, many of which are financial institutions. As these companies have been drastically cutting costs, Imation experienced a revenue shock. But as the company eventually aligns its costs with a lower revenue environment, it should be able to generate returns commensurate with its historical average.

And what offers investors protection while this company attempts to return to profitability is the fact that Imation has no debt, and has a cash buffer of $80 million (after subtracting upcoming payments for a recent litigation settlement). Furthermore, its net current asset value (current assets less all liabilities) is $400 million, well over the company's market cap.

Disclosure: Author has a long position in shares of IMN


Unknown said...
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Unknown said...

2007 and 2008 were both record-revenue years, while IMN increased operating costs by 28% and 30%, respectively. Gross margins compressed by about 5% - indicating supply-side cost increases. I don't think this is indicative of a company that is 'adjusting to a lower revenue environment'. I'd be curious to know your thoughts on why their operating costs have skyrocketed. The pressures on gross margins make sense in a world of higher commodity prices and more intense price-competition.

Saj Karsan said...

Hi turb,

I was referring to this year as the one with the lower revenue, not the boom years. I would agree there was likely competitive pressures and higher costs causing the lower gross margin, but in the last half of 2008 and so far in 2009, the recess likely played a major role. Costs have been coming down, but it will take time to restore margins to normal levels.

Iowa said...

I wanted to get your take on our good friend Graham's advice of collecting bargain securities at 2/3 Net Working Capital. Imation's price currently represents 78% of NWC. In your experience, when have you pulled the trigger to purchase (or make your collection of purchases)? As the 2/3 threshold has taken place or higher than that when you believe the price is representing a good deal that you are willing to sleep with?

Saj Karsan said...

Hi Iowa,

It would have to depend on the individual situation. It depends on the nature of the assets (how liquid, how valuable) as well as how the business is doing from a cash flow and profit/loss point of view. As a result of taking these other factors into consideration, I've bought on both sides of the 2/3 benchmark you refer to.

Unknown said...

Hey Saj, I have been looking over this company's products online and reviews. To be quite frank, I do not know how this company can stay competitive. They have no niche, or specialty. CDs, DVD-Rs, etc, there are like hundreds of competitors and they have no edge in that field. Same with flash memory and usb thumbdrives, everyone makes those.

I also looked over their SSD product reviews, and there were many negative remarks. There are better brand names out there.

Next their Apple accessory line is also highly competitive and none of their products stands out. Companies such as Griffin does a better job and have more name recognition. Also relying on Apples success for one segment of their business isn't a great long term plan.

What do you think?

Saj Karsan said...

Hi AK,

I agree that they do not appear to have a competitive advantage in many of their products. Nevertheless, the business still has some worth. I am surprised it trades at a discount to its net current assets, even if they do not consistently generate returns above their cost of capital.

Unknown said...

What is your take on Buffets cash in his pocket philosophy for investors like ourselves. Looking at INM cash flow, by Buffets equation their cash flow is awful. They are just reducing inventory and collecting payments to get cash but that is not a long term solution to their cash problem.

I understand Buffets cash formula is important to him since Berkshire usually owns large stakes in many companies so the more cash "in his pocket" from the company means more cash for him to invest else where with.

To the rest of us, however, whom probably do not put a dent in most companies market cap how important is cash flow?

Saj Karsan said...

Hi ak,

This is not a Buffett-like company, as it doesn't generate a great return on capital.

That said, I'm not sure what you mean by "cash problem", as the company can easily cover its obligations and then some. This is more like a Ben Graham company, where the company trades for a discount to its assets, including a healthy cash balance.

Unknown said...

Hey Saj,
About their cash flow, I'm a little concerned how majority of their recent cash inflow has been due to net change in working capital. Meaning they are delaying payments, while collecting from a diminishing AR. What are your thoughts on that?

Saj Karsan said...

Hi ak,

I agree, it appears they have been collecting cash from inventory and A/R, and delaying payables. Unless there is a permanent change in how they pay their suppliers, the cash balance may fall. On the other hand, the company's operations do generate cash as well, so it's unclear exactly what will happen.