Thursday, November 22, 2012

Ballantyne Strong - Theatre Projection Systems

The improvement in the financials after 2008 reflects the attractiveness of the digital projection business. The equipment costs a lot more and there are service agreements attached. Ballantyne Strong is now almost completely out of analog.


“In July 2012, the Company was notified by the Chinese Customs Authority (the “Authority”) that they will be reviewing the Company's 2010 tax filings for outstanding Value Added Tax (VAT) due to the Authority.  The Company is currently assessing the situation and is unable to determine the impact, if any, there will be to the financial statements.  However, the Company believes it has all significant VAT taxes appropriately accrued in the financial statements at September 30, 2012.”

Few things in investing are quite as meaningless as the designation “net-net”, but, for what it’s worth, Ballantyne Strong is a moated net-net.  $8 is a fair estimation of its stock’s value.

Disclosure: No position


  1. Are recent results sustainable, or have they ridden an initial wave of digital conversions that will not repeat?

    The company touts its remote servicing business, the Network Operations Center, but what is the moat for this business?

    Finally, are you comfortable with the capital allocation abilities of current management?

  2. Apologies but am confused as to your definition of ROIC

    Thus for 2010 - is it Operating Profit/ Net Operating Assets - ie 8.66/ 29.87 = 29.0% but your calculation says 36.93%

    Any colour gratefully received

  3. Thanks for the questions.

    There's no question that the company has benefited from the wave of conversions from analog to digital. Still, I think the next ten years may look better than the last ten years:

    1. The transition is not yet complete -- assuming that 20% of movie screens die out because their owners can't afford digital, we're perhaps 80% of the way through in the conversion process. The "VPF" subsidiy was due to expire and has been extended, so the next two years will see the last frenzy of initial conversions.

    2. Analog equipment lasts 30-40 years; digital equipmnent lasts 5-10 years, so film exhibitors have noe stepped into to the "refresh cycle", and this process will replay every 5-10 years.

    3. In digital, maintenance, service, and repair etc are nontrivial, high margin revenue streams. The idea is that BTN, can leverage its longstanding relationships with film exhibitors to be the IT department, therefore collecting service fees. And service fees, of course, are low in capital requirements, recurrent, and scalable. BTN has a network operations center for this purpose, is looking for acquisitions to add to its capabilities in this area, and is considering adding network operation centers in select international markets.

    4. There is no moat in the business before one has won the initial installation of digital projection. Winning the install allows one to bundle the maintenance service. incumbency is easier than insurgency. Scale economies are only of modest help in this business.

    5. Management has let the cash accumulate. They're now buying back quite a lot stock. As I mentioned, they're also looking for bolt-on acquisitions to strengthen their maintenance and service offering. My guess is that once they've transitioned into majority-service mode, they'll sell themselves to a private equity firm: stable cash flows + no debt = PE honey.

    6. ROIC: the operating profit was earned between the two balance sheet days, so ROIC = Profit/(Net Op Assets t + Net Op Assets t+1)