Tuesday, February 15, 2011

Imation: Mr. Market Cheers, But Risk Goes Up

Sometimes a company is so cheap, that a value investor can make a significant amount on it even when its management pursues strategies which are "anti-value". Consider shares of Imation, a company that has been previously discussed on this site as a potential value investment. The shares rose significantly last week after the company reported its latest results. But while the company's cash position is still 2/3's of its market cap, management appears to be making decisions that are increasing the company's risk.

Imation has decided to undertake a "new strategic direction as a global technology company dedicated to helping people and organizations store, protect, and connect their digital world". This certainly sounds like great news for global citizens with disconnected digital worlds, but what does it mean for value investors?

1) "The Company announced today a new $35 million restructuring...The restructuring will result in approximately $30 million of future cash expenditures."

Imation is a perennial "restructur-er". Write-downs in 2010 included $78 million, made up of some Goodwill write-downs, some severance pay, property writedowns, equipment sales etc. What's unattractive about this new restructuring is that it is not just a write-down of some long-lived asset that is not performing; it will require a cash outlay.

2) "[In addition], the Company expects incremental organic investment of $15 million focused on technology; expanded sales and marketing coverage for the VAR (value added reseller) and OEM channels; improved decision-support tools in IT, and international expansion, focused on China."

Imation is not very profitable, and hasn't been for a while. So when management is deciding to continue to invest, rather than return its strong cash flows to shareholders, risk increases.

3) "The Company also anticipates investments through acquisitions...with the potential for several acquisitions each ranging from a few million dollars to $50 million."

More cash (of amounts unknown at this time), will be expended on high-tech products with uncertain futures.

4) "[A] stock buyback, restarting share repurchases under the Company's existing board authorization of 2.3 million shares"

This is a case of too little, too late. This authorization represents just 5% of the company's outstanding shares, and has already been in place for a while. While the company has generated $200 million of cash from operating activities in the last two years (which is almost half of today's market cap!), Imation has paid no dividends and bought back no shares over this period, even though shares were a lot cheaper a few months ago than they are today.

So rather than return cash to shareholders, management appears bent on growing the business even though it has shown an inability to do so thus far. At the current price, and considering the uncertain investments management wants to make going forward, value investors who purchased (for the reasons discussed here) back when the stock was 30-40% lower last year or the year before may want to cash out and look for more value-friendly investments.

Disclosure: None

1 comment:

Todd Metheny said...

That's how it always works, though, isn't it? Management buys back shares when prices are high and conserves cash when prices are low. It's negative from a value perspective but makes sense in a way. Companies have better access to capital markets when their share prices are robust, which makes cash less dear. It still stings if you're an investor, of course! Nice post.

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