>>>>>A favorable article appeared about Imation in the Contrarian section of the latest Smart Money<<<<<
Hi spinFan,
I found the article you mentioned and thought I would post it. Thanks very much for the reference.
Best regards,
Ron
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Smart Money May 1998
Contrarian
A Treasure in 3M's Trash
by James R. Hagy
Most Investors avoid spinoffs. After all, who wants to own a company's unwanted refuse? For a contrarian, though, this is precisely the reason to seek out spinoffs. It's an area full of beaten-down gems. And academic research backs this up. Over the long term, spinoffs tend to outperform the market, especially after management has gotten used to its newfound independence.
That's just part of the story behind Imation Corp., the $2.2 billion technology company spun off in July 1996 by Minnesota Mining & Manufacturing. Imation, like many spinoffs, is hard to figure out, especially for analysts used to covering its blue-chip parent company. So after it went public, the stock languished near its offering price before getting creamed in last fall's tech correction. Now Imation trades at about $19, barely above book value and at just 33 cents for every dollar in sales. Companies this cheap are usually either in their death throes or woefully misunderstood.
Imation falls in the latter camp. The evidence: Wall Street's puzzling take on the company. "Imation is in two businesses, and neither has a stellar outlook," reads a recent report by Donaldson, Lufkin & Jenrette analyst Ty Govatos. "The photo business is undergoing a shakeout, and Imation is a secondary player." Sounds serious until you consider that Imation derives only 5 to 10 percent of its revenue from its photo-film business. Govatos also frets about the prospect of cheap floppy disks from Asia hurting Imation's profits, neglecting the fact that the company actually imports disks from Asia when prices there drop.
Finally, several analysts decry the falling margins of Imation's mature products. A problem? Sure, if you're talking about an automaker. But that's life with a tech company. The key is to have new products ready to roll out as your old ones lose their luster. That's just what Imation has started to do.
The confusion has created a compelling opportunity. "There's a strong value advantage to not being part of 3M anymore," says Imation's chairman and CEO, Bill Monahan. Yet Imation's share price remains stalled, dogged by Wall Street's negative opinions as well as the company's 1997 results. Last year the company lost $180 million, largely because of $200 million in one-time restructuring charges. Excluding these, Imation earned 51 cents a share. The Street expects 80 to 90 cents this year, but some investors expect more. "I'm thinking $1.25 this year and $3 in 1999," says Gregg Powers, a principal with Private Capital Management, a Naples, Fla., firm that is consistently ranked as a top money manager. The firm began buying the stock last fall in the low 20s and was still adding to its 3.5 million-share stake in March. Powers says cost-cutting and increasing sales of high-margin products will fuel the surge in earnings. Management expects to cut costs by $35 million this year and $90 million in 1999, in part by slashing 17 percent of its bloated workforce.
Meanwhile, several key products are just starting to contribute to the bottom line. The hottest is the Dryview laser imager. It produces images captured by MRI and ultrasound machines. Unlike conventional medical imagers, Dryview doesn't use wet chemicals to process film. "This is what got us excited about Imation," says James P. Benson, an analyst with Harris Associates, the Chicago firm that manages the highly respected Oakmark funds and is one of Imation's biggest shareholders. And the real money here is not in the machines, but in the film - so profits are expected to surge in the next several years.
Then there's Imation's SuperDisk technology, which competes with Iomega's Zip drive. Iomega is the market leader, but SuperDisk counters with a competitive advantage. Unlike the Zip, SuperDisk can use standard 1.44 megabyte floppy disks as well as SuperDisk diskettes, which provide 120MB of storage. Monahan expects the company to sell 4 million to 5 million SuperDisk drives this year. With that base, sales of SuperDisk floppies alone could top $300 million.
Overall, Imation's "growth portfolio," which includes a handful of other hot products, accounted for 22 percent of sales in the fourth quarter of 1997, up from 8 percent a year earlier. Despite this growth, Imation's overall sales will likely remain stagnant this year because of pricing pressure on its older product lines. "This is a classic business-school study," Benson says. "When you can get costs falling more rapidly than revenue on the mature businesses, and then layer on top of that a portfolio of growth businesses, the company can do quite well."
Powers says that the turnaround will be evident when Imation releases its third-quarter results this October. That quarter, he notes, will be the first in which the company fully benefits from the restructuring's cost savings and the ramp-up in Dryview and SuperDisk sales. He pegs Imation's value at $40 to $50 a share.
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