“The Next Small-Cap Blockbuster” (Nancy Zambell)

by Travis Johnson, Stock Gumshoe | May 12, 2010 11:35 am

Today the world’s thoughts are turning to gold[1] … but just to be contrarian, I thought we’d look at something a little different.

OK, a lot different. This is a teaser from Nancy Zambell[2] for her Buried Treasure Under $10[3] newsletter, which I wrote about several times last year but hasn’t been quite as high profile of late … and she’s found a small cap (very small, I think) stock in Nebraska that she thinks will surge on the “digital revolution” in movie theaters. Here’s how she puts it:

“The Next Small-Cap BLOCKBUSTER

“Plane Ticket to Nebraska: $250
“Rental Car for 3 days: $125
“Hotel for 3 nights: $345

“Visiting an undiscovered small-cap company set to surge 50% in 6 months: PRICELESS”

Sounds like fun, right? Good thing she didn’t make her visit at the same time that Warren Buffett[4] was having his annual meeting for 40,000 of his closest friends, or she would have had to pay a lot more.

She calls the stock “dirt cheap, undiscovered and ready to rise 50% in the next 6 months” … so who is it?

Just wait a moment for the clues, will you?

“A Digital Revolution…

“Just take a look at last year’s blockbuster 3D hit, Avatar. It doesn’t take a computer scientist to see that we’ve come a long way since Creature From the Black Lagoon and those flimsy 3D glasses.

“Digital technology is drastically changing the face of cinema because it’s…

• More compact.
• Less costly.
• Doesn’t break like film.
• Much nicer to view.

“The company that I visited is leading this change. Its management saw the digital and 3D wave coming long before their competition, and its sales and profits are exploding as a result of its foresight.

“It’s this type of forward thinking that drives good companies to be great companies—and makes savvy investors a boatload of money.”

OK, so that’s lovely — makes sense that theaters would be upgrading to digital for the ease and cost savings and flexibility (they can show ads, too, or often live simulcasts or special events). And we all heard plenty of hype about Avatar in 3-D last year, a film I still haven’t seen (am I the last one?) … and, frankly, investors have been aboard the IMAX story for a long time, the purest “next frontier of movie theaters” stock story around, but this is clearly not IMAX that she’s teasing (unlike when I owned it years ago, and gave up too soon in another crisis of patience, it’s no longer “under $10”).

So it’s some other digital projection equipment and installation company, it sounds like. Let’s dredge a few more clues out of the teaser ad:

“Only 11% of all movie screens—or 150,000—in the world are digital. Only 4,000 screens are 3D ready. That’s a huge catalyst for growth!

“It’s what led me to Nebraska to a small-cap company that can completely outfit a theater—top to bottom—in 3D technology. From digital projectors to screens to sound systems to power supplies—this company offers it all.

“In fact, it’s already a leader in the “whole theater” concept. And it’s poised to capture even more market share as the transition to digital heats up….

“I saw a company bursting at the seams with orders, and workers at every level of the company rushing to keep up….

“Add in the company’s tremendous 2009, in the heart of a recession—revenues were up 31% with equipment sales growing 122% and its screen business expanding 79%…

“…and its presence in Asia[5] for more than 40 years, where the company is directly in line to profit from the China[6] market that is growing by 43% this year alone…

“…and that the stock is basically undiscovered—less than 30% of its shares are held by institutions…”

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OK, so that’s what we get by way of some clues — it’s in Nebraska, sales were up 31% from 2008 to 2009, some focus on China and Asian growth. Who is it?

Thinkolator sez we must be looking for: Ballantyne of Omaha (BTN)

Usually going by the name Ballantyne Strong, or selling under the Strong brand name, this is indeed one of the major suppliers, manufacturers, installers and distributors of movie theater equipment — their history was in building and selling the standard film projectors, an area where they had a very strong market position, and in recent years they’ve evolved with tight relationships with digital film projection companies to sell, install and service their equipment (as well as still some of their own stuff, including screens, sound equipment, etc., and I think they are still making film projectors as well). Their biggest operation currently seems to be a worldwide distribution deal with NEC for their latest digital projectors.

So yes, they are in Omaha, and yes, their sales did go up by exactly 31% last year, so that gets us a nice match. Institutional ownership has climbed a bit from Zambell’s 30%, assuming I’m right about her pick, but it’s still low at 40%, as you’d generally expect for such a small company.

Small, you say? You bet — this stock is teeeeensy with a market cap of not much over $100 million, and has better than doubled over the last six months, so although it’s not particularly well known it has been “discovered” by small cap growth investors. There’s only one analyst covering the shares according to Yahoo[7] Finance, and that person projects 24 cents per share in earnings for 2010. The stock price is at $8.40 right now, so if that analyst is right you get a current year PE of 35 (trailing PE is very steep, Yahoo Finance has it at 58).

That means current investors are focused on the big transition to digital, which is still far from complete — Zambell says that there are 150,000 movie theater screens, only 11% are digital, and only 4,000 are 3-D ready. Here are the numbers that Ballantyne Strong shared at a Wedbush Morgan conference a little while back:

Digital Cinema Market Potential

• 117,000 screens worldwide (~16,405 converted at 12/09)
  –8,246 3-D screens 12/09

  –39,000 screens in U.S. (~7,584 converted)

• 3,367 3-D screens 12/09
• ~18,000 ouside DCIP – 8,000 in Cinema Buyers Group
• 9,000 screens in Central/South America & Mexico[8]
• 9,000 screens in Asia and growing
  –6,000 screens in PRC & growing to 13,000
• 14,000 DCIP screens (AMC, Cinemark & Regal)

So, it doesn’t matter that much which numbers you follow — it’s obviously a huge potential market for both new theater installations (in China, especially) and for conversion of the 80% or so of existing theaters elsewhere in the world that are not yet digital, or, if you believe 3-D will really take over now (following Avatar I think there are now more than 20 3-D releases scheduled this year), for the far greater number of theaters that aren’t yet 3-D capable.

Will that make Ballantyne a winner? Well, as far as I know this is the only big, publicly traded company that does this kind of installation and service work (apart from Imax, which is a billion dollar company but focuses on a much more expensive, proprietary format — not feasible to have eight of them in your local cineplex), but I’m sure there are many smaller companies and consultants that do similar stuff … and the big chains, like AMC and Cinemark, could probably create divisions to do their own installation if they so choose, though Regal, for one, has been hiring Ballantyne to do a lot of the work. They do have a good base of customers from their long history as a supplier and a service company, though service revenue is a long way from becoming a core part of their sales right now (the hope is that they build up a big installed base of digital theaters, who will then contract with Ballantyne for ongoing service and maintenance of the equipment, but for now the vast majority of their income comes in from product sales and installation and retrofitting of existing theaters.

So … if you like small stocks that are showing tremendous momentum Ballantyne Strong might be right up your alley, but do be careful, I’d expect it to be extraordinarily volatile now that the investment thesis is no longer that they’re cheap on earnings, as you might have argued at $3 and change late last year, and is now based on expected very rapid growth. That’s not to say that the growth won’t come through, of course, and they said lots of good things on their recent Q1 conference call[9] … just that expectations are getting pretty high.

I had never heard of this company before this morning, but I like the 2-3 year growth prospects for the stock after doing some quick reading on the business, and I wouldn’t be shocked if Zambell is right and these shares move by 50% in six months … but depending on the progress over the next couple quarters that 50% move could almost as easily be down as up.

So what do you think? Excited about the prospects for digital cinema and 3-D, and think either IMAX or Ballantyne (or both) or the theater chains will reap the rewards? Or is this resurgence of movie theaters and box office revenue a flash in the pan, and we’ll be heading back to the “movie theaters are dead” argument in a couple years, just like we did when big screen TVs first became widespread? Let us know where you stand with a comment below.

And if you’ve tried Nancy Zambell’s Buried Treasure Under $10 newsletter, please click here to review it for your fellow investors[10] — thanks!

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