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
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.
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.
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?
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.