Ballantyne Strong: What Can Go Wrong
A risk/assumption analysis of my investment in Ballantyne Strong
If you haven’t had the chance to dig deep into the research file I put together for BTN I suggest you read it before you read my thesis. You can find it here:
What can go wrong?
With each investment, there is the bullish side and the bearish. I wrote the thesis to outline the bull case as to why I think there this could be a strong investment with my intrinsic value calculation. But there was little discussed about the risks of the investment.
To me, the most important risk is whether or not you will experience a permanent loss of capital over the course of your investment. This means, what are the odds of losing money over a 3-5 year holding period. I believe given the current price which BTN is trading for in the market, the upcoming IPO of the strong entertainment division, and the continued capital allocation strategy limits this risk by a substantial amount.
But it’s not in my investment strategy to only buy a company that is underpriced. I look for companies that I believe can compound money for quite a few years and this desire to capture the results of the business leads to the exposure of different risks. The success of the investment turns from a repricing of the asset into following the progress of the business into the future which turns the risks from capital loss to risks of business operations.
The best way I know how to flesh out all of the risks inherent in a business is to question the assumptions. So here is a list of the assumptions I made when deciding to buy shares in BTN, each of them accepts a certain risk. We could go on and on about the different types of risk in each category so I’ll try to narrow down to the key assumptions, the two to three variables in each segment that really drive the performance.
To analyze BTN you have to be able to weigh the prospects of each segment and handicap the risks for the specific business. We’ll start with the business risks with each of the segments then finish with the risks and assumptions associated with the investment itself.
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The movie industry will continue to be a viable area to make money and people will still want to consume entertainment through a projection screen: If the streaming economy and other external reasons cause the movie-going industry to completely shut down, or, experience box offie performance less than previous levels this could lead to theater chains going out of business, and the fewer screens there are in the US, the less market addressable by strong entertainment.
The demand for curvilinear screens and the service contracts will continue to increase: Like the above risk, if there are fewer screens to sell, the smaller the market. Strong is combatting this risk by moving into complementary business adjacents by making immersive-curvilinear screens which open their market to not only movie theaters but theme parks, museums, and military training facilities. The services side will also combat a reduced demand for screens. The move to a more technological projection system will require an understanding at a level of sophistication higher than before which can cause theaters to outsource the service of the screens and projectors so they don’t have to deal with hiring and training staff to do so.
Strong will be able to maintain/ grow market share going forward and keep strategic partnerships with theater chains and projection suppliers: They have a strong position in the theater business and the recent deal with AMC increases their moat more. If they lose any of these big agreements there will be a material decline in operating performance.
The demand for lumber will be larger than it has been in the past decade and GreenFirst will be able to meet the demand: The age group 30-39 now outnumbers the 20-29 year group and this shift occurred in the last 2 years which means two things 1) A large age group just entered into the “home buying” age and 2) we don’t have enough homes to meet this growing demand because of under-building, the hangover from the GFC, and lumber supply reduction from forced harvest due to pine mountain beetles destroying almost 9 million homes worth of lumber over the last 15 years. If this demand never materializes then it will be a subpar result. This is a macro play and is hard to forecast.
Lumber prices will continue to trade at a higher than historical price than in the past 10 years- The purchase price of these mills provides a margin of safety but if lumber trades near historical prices around $300-500 per thousand board feet then there will still be a cash flow. If it does trade higher, there will be plenty of upside. I am a believer in the lumber thesis and the price at which these assets were acquired makes for an interesting bet even if the thesis proves out wrong.
GreenFirst will be able to 1) protect the forests they own and 2) open the Kenora mill improve utilization rates of the mills they acquired and 3) improve utilization rates of the mills they acquired: If they are unable to harvest the trees they have access too there will be no product to sell (see mountain pine beetle). If they can’t improve utilization rates the ROI of the mills will be less than desired but the low purchase price provides a margin of safety should this be true. If they can’t open the Kenora Mill that takes 155 million board feet of capacity offline and would be a blow to operating results and expectations.
Management will be able to sponsor/co-sponsor SPACS: This ability to prove as the sponsor of choice and to partner with others to do deals will be the overall driver of value for FGF shareholders. If they are unable to source deals it will be the biggest effect on the performance.
They will conservatively underwrite insurance: Bad underwriting can lead to large losses that can sink a ship. If FGF can succeed they need to have strong underwriting.
The SPAC investments will bear fruits well above their cost: I am assuming the track record that management has prior to starting this venture will continue in regards to being able to identify and make successful investments. The capital allocated to SPACs will mean nothing if they are all duds.
Companies will want to spend money on DOOH ads: Companies have to effectively spend money on advertising to stay relevant and DOOH desire has to compete with Google, Facebook, and Amazon. Now there are many different types of ad campaigns but DOOH has to prove to be a viable way for advertisers to connect with customers. The top of taxi cab ads have been around for a while but the transition to digital tops and this kind of data integration is somewhat new and is still proving the viability of the product. This trend must continue for FireFly to grow revenues.
They will be able to defend their position from the competition and survive: The size of their network is directly correlated to the size of their moat. The recent acquisition of, Curb Tax Media gives them a massive “land grab” of screens, increasing their moat. But we have seen others try to enter the space, like Uber. I am sure it won’t be the last attack on their castle, so they must be able to survive long enough to become one of the premier competitors in the space. Survival is the focus right now. Everyone wants in at the beginning and they need to build the New England Patriots of DOOH ads if they want to win.
Ballantyne Strong Investment
Management will continue to work for shareholders and focus on building intrinsic value per share through capital allocation: Since new management took over in 2015 there has been a number of moves reallocating capital into the most effective places. We have seen a capital shuffle of disposal of bad assets, exchanging operating assets for equity, and strategic investments into public equities. To quote the Chairman, Kyle Cerminara, “Everything I do is to make the share price go up”. All of the internal moves can be traced back to the creation of shareholder value.
Some of the investments made will bear JUICY fruits: I am gonna assume some of the investments made might not turn out as expected. The good news is the market price is currently expecting nothing from the company so there is a margin of safety by buying the basket. Even if 2/4 works out really well it will make the market cap look like a joke. It is going to take years to materialize but if the majority work out in a favorable fashion, home run.
The IPO of Strong Entertainment will unlock the value of the asset which will translate into a repricing of BTN’s ownership leading to a higher stock price: I valued the asset between $30-45 million. If this is somewhat accurate then we should see a correction in the share price after the IPO. The closest comparison is Moving Images Technology trading for $13 million in the marketplace. This company has done $8 million in sales and BTN has LTM sales of $22 million. Using the same sales multiple as the nearest comparable we would get a value of $33 million. I think using this comparison multiple is extremely conservative given the difference in the quality of the two companies. But, you get the point.
When Am I Wrong?
Along with an assumptions/risk analysis I like to write a premortem because it’s important to have someone, “Pull you out of the fight” and this is the way I will know when it’s time to pick up camp and find another investment. First, you have to give the thesis time to work so I will be using a time frame of around 2-3 years which I believe is a long enough time to see management execution and for the market to figure it out.
I will be wrong when after 2-3 years if:
Strong Entertainment shows declining revenues and they begin to lose key partnerships and exclusive contracts. This might happen if box office numbers never reach pre-pandemic levels again and the industry consolidates leaving less of an addressable market.
GreenFirst is unable to execute on improving operations of the assets they acquired, the demand for lumber never materializes over the next 3-5 years, and if there is demand, GreenFirst is not able to supply the demand effectively.
FGF can not continue to execute its SPAC and underwriting plans. They have a few claims that adversely affect financial conditions. They make some bad investments and shareholder money evaporates.
FireFly gets steamrolled by competition and is unable to capture enough market share to make it an economically viable company.
None of the investments work and they lose the money invested.
BTN management falls off the path of allocating capital effectively for shareholders, they chase bad investments that are akin to lighting shareholder money on fire, they try to employ debt in the wrong situations and it causes a bankruptcy proceeding.
I will continue to reassess the prospects of this investment in the future but for now, it’s time to sit back and see what plays out.
Please be advised, Wall St Gunslinger is not an investment advisor and does not give personal investment advice. All content is for educational and entertainment purposes only and should not be interpreted as anything other than such. Investing entails a lot of risks and should be managed appropriately. Please do your own research and consult with an investment professional before making any investing decisions. Thank you.
Disclosure: I am long BTN