Long Shot: A Microcap With Strong Potential

 | Apr 25, 2013 | 2:00 PM EDT  | Comments
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Real Money's Long Shot column is dedicated to trading ideas that are highly risky but which present an opportunity for significant payoff if they work. Such ideas are sometimes characterized as "lottery tickets" and are for only the most risk-tolerant investors, as the potential for 100% loss is high.

Only because this company has a market cap of $60 million does it have to be labeled a long shot. Other than that, the attributes of this stock make it look very attractive in today's value-starved market. To your attention I bring Ballantyne Strong (BTN), an Omaha, Neb., based manufacturer and distributor of digital theater and lighting systems.

The theater segment distributes cinema projectors, digital projectors and other theater-related accessories. This constitutes the bulk of the company's business. As you might imagine, Ballantyne's business is highly dependent on the health of theater operators, specifically the transition from today's real projection systems to digital cinema. In 2011, on the heels of strong demand, Ballantyne Strong reported net profit of $10.3 million. In 2012, net profit dropped to $5.5 million.

Still at a $60 million market cap, Ballantyne Strong trades for just over 10x 2012 earnings. But that's not what makes this opportunity so compelling. Tucked inside the balance sheet is $40 million in cash and no debt. Strip out the cash, and Ballantyne Strong has an enterprise value of $20 million. The business trades for less than 4x enterprise value.

Shares currently trade for $4.30, and there is nearly $3 per share in cash against book value of $4.79. More so, on the last earnings call, many shareholders drove home the fact that at current prices, the company should be using its excess cash to buy back shares in the absence of accretive acquisitions.

So there you have it: Ballantyne is a decent business. Over time, one would expect more movie theaters to transition over to digital projection. And going to the movies still remains a favorite recreation for many Americans. Even at $10 to $15 a ticket, it's not a bad value proposition for two hours of entertainment.

But it's the balance sheet and income statement that make this an attractive long shot. Shares traded as high as $6.50 a year ago. There's no reason they can't get there again. In the meantime, Ballantyne offers tremendous safety in numbers, not only from the balance sheet but from the shareholders who will press further for buybacks or dividends in the event of a share-price decline.

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