Ballantyne Strong Has Room to Run

 | Oct 22, 2013 | 1:00 PM EDT
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Several months ago, I stumbled upon Ballantyne Strong (BTN), a micro-cap provider of digital theater technologies and solutions. The company also had a small budding specialty lighting business. At the time shares were trading around $4 for a market cap of around $54 million. The company was debt free and had over $3 per share in cash.  

In recent weeks, shares in BTN advanced to $5 and now sit at $4.75. The catalyst for the stock price move was the company's $16 million cash acquisition of Convergent Media Systems. CMS manages digital media solutions consisting of over 95,000 displays for companies such as Kroger (KR) and retailers such as Best Buy Canada. The deal will add over $40 million in revenues to BTN and management expects an incremental $0.06 to $0.10 in earnings per share in 2014 and $0.15 to $0.20 in additional earnings in 2015.  

News of the acquisition sent shares in BTN up over 25%. Rarely do you see the acquiring company shares advance when making an acquisitions. But on the surface, this deal looks like a shrewd bet. If the new BTN can execute, shares in BTN could move higher for many years to come.

According to Ballantyne management, the combination of these two companies will create one of the biggest and best capitalized companies to exploit the digital out of home (DOOH) and enterprise video solutions (EVS) market. The DOOH market focuses on out-of-home text messaging, advertising and communication to consumers while EVS provides businesses with the infrastructure necessary for the communication, education, and training of employees. The approximate size of this market is $4 billion annually.  

For months, shareholders have been pressuring BTN to effectuate shareholder value with the company's significant cash holdings. BTN responded by making this acquisition and the market so far has approved. Even after the deal, BTN still remains a debt-free enterprise with nearly $30 million in cash. So from the looks of it, this deal was a clever capital allocation decision, but still leaves the company with plenty of ammunition for other value creating options. 

The company now has a market cap of $66 million, or an enterprise value of approximately $36 million.This acquisition creates a company with over $125 million in annual revenues, and perhaps as much as $6 to $7 million in profits in 2014. This would suggest a forward valuation of less 5 to 7x EV.

The market doesn't have many debt-free, growth companies trading at these multiples. For patient investors, this little gem could be a keeper for years to come.

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