Thursday, August 18, 2011

What Imation Says vs What It Means

All companies say they want to add value for shareholders, but not all actually mean it. Sometimes, investors have to read between the lines to figure out what are management's true intentions. This article contains some comments from Imation's management team on its recent conference call, followed by a translation for shareholders of what the comments may actually mean.

Through the stock market's recent turmoil, a number of stocks have gotten hammered. Subsequently, some have recovered to a certain extent, while others have remained depressed. Imation (IMN) falls into the latter category, as its price is near that of its 2009 low, some 20% below its month-ago level.

As a result, IMN trades for a significant discount to its net current assets. But before investing in such companies, investors should try to get a read on management's intentions, for if the current assets are diverted away from shareholders, they are at significantly more risk than otherwise!

In many cases, incentives for management are such that it makes more sense for managers to strive for market share and/or growth at the expense of shareholders. This may be the case at Imation, where the company's CEO derives an annual salary that is far higher than his ownership of the company's shares. As a result, even though the company has generated almost $220 million from operations in its last two years (against the company's market cap of just $280 million!), no dividends were paid and no shares were repurchased during this period.

Here are some statements from Imation with translations that make management's intentions clear:

Management says: "Overall, our rate of revenue decline moderated in the quarter, and we saw continued revenue growth in our new lines of secure and scalable data storage products."

What It Means: Revenue was down, but it was up in some areas, meaning it was really down in other areas.

Management says: "In June, we completed the acquisition of the assets of Montreal-based MXI Security, a leader in high-security and privacy technologies."

What It Means: Rather than return our substantial net cash position to shareholders, we spent a chunk of it, even though our ROE has been negative for some five years now.

Management says: "We remain committed to and are making steady progress in our strategic transformation to a global technology company. While we have much work ahead, I remain confident that we will successfully execute on our vision."

What It Means: Transformations are expensive, so expect us to spend a lot more money with some pretty uncertain future results.

Management will never say it doesn't intend to return money to shareholders, so investors have to figure it out for themselves.

Disclosure: No position

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