INSIGNIA SYSTEMS INC ISIG
June 04, 2014 - 9:47pm EST by
jcp21
2014 2015
Price: 3.19 EPS $0.10 $0.15
Shares Out. (in M): 13 P/E 31.9x 21.3x
Market Cap (in $M): 41 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 21 TEV/EBIT 7.0x 5.5x

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  • Industry Consolidation
  • excess cash
  • Customer Concentration
  • Competitive Industry

Description

I will keep this as short as possible, and the company has a market cap of only $41 million, so this idea is not for everyone.

[For a brief overview of the business, see this presentation - http://insigniasystems.com/files/7414/0059/2517/ISIG-Drexel_Hamilton-May2014.pdf]

The long Insignia Systems call is one that should interest catalyst focused investors. Until early 2014, grocery store in-aisle advertising space was a three player game. News America was by far the largest followed by Valassis and Insignia. Valassis was acquired in 2013, and the new owners decided to shift Valassis away from the in-aisle advertising space. Without knowing for sure, the move was potentially motivated by the low growth nature of the space combined with the threats froUm online and discount grocery store options (see risks for more industry details).

The move creates a significant opening for Insignia which had already been ramping up its sales force significantly. Additionally, the company’s new sales chief has experience with both Valassis and News America.

First, Insignia was operating with a working agreement to sell certain products in the Valassis network. With Valassis out, Insignia can now sell directly to those retailers. Not only will this change result in more volume, it will also be at higher margins (no middleman). Furthermore, the old Valassis retailers should have some bias towards working with the already present Insignia to increase the possibility of getting uninterrupted service. Already, Insignia has signed a deal with a former Valassis retailer.

Second, the move will put pressure on the industry to lift up Insignia with the goal of preventing monopoly-like behavior from News America  [The industry has reasons to worry about this - http://www.cbsnews.com/news/why-ftc-should-examine-valassis-and-news-americas-500m-settlement/].

Apart from the significant intermediate-term catalyst, the near-term trends are very positive. Sales are up 14% on a trailing twelve month basis. The company’s backlog is up 10% with 11 new CPG accounts in 2014. Furthermore, legacy sales were up in Q1. These trends will only accelerate as Insignia takes advantage of the vacuum left by Valassis.

Without factoring in the intermediate term catalyst, the company trades at approximately 7x 2014 EV/EBITDA. I don’t have a price target in mind because the range of positive outcomes from the catalyst is fairly wide.

Also, with $20 million in cash on the balance sheet ($41m market cap) cash management is a huge issue. Based on the most recent conference call, the company plans to do strategic buybacks  on drops in price. That ensures the share count reduction is maximized. However, there is no way of knowing for sure how that will play out when events actually unfold.                

Key risks include the following:

1)      Another marketing firm could enter the in-store market. I view this as a possibility given that “know how” as opposed to capital is the primary barrier to entry. However, most companies are not generally inclined to make significant moves into  “old fashioned” forms of marketing. That being said, the Valassis exit could cause some firms to consider the possibility.

2)      New digital products could reduce the relative value of Insignia’s products. From the standpoint of in-aisle grocery store advertising, the extra cost of digital usually doesn’t result in enough extra sales to justify a shift. Additionally, consumers in grocery stores aren’t showing much digital engagement. A simple physical banner near the actual product gets the job done. Read this article to learn more about the relatively strong value proposition that Insignia type products possess - http://media.corporate-ir.net/media_files/irol/19/190067/press/AWSJ.pdf. Also, the new sales chief has experience with digital, so the company is positioned to potentially take advantage of the trend if it develops.

3)      Customer concentration: one company accounts for 31% of sales. The second largest customer accounts for 14%. Insignia has lost major customers before despite some switching costs so this risk is material.

4)      Insignia depends to some extent on a relationship with News America that expires in 2021. This arrangement was the result of a 2011 settlement with News America related to antitrust and false advertising claims. If the relationship with News America deteriorates, the company could have trouble selling into its network.

5)      Key risk: grocery stores over the long-run could be in some kind of secular decline. I believe the decline will be very gradual and eventually stabilize given the many practical challenges associated with online grocery shopping. The bigger threat comes from discount retailers like Wal-Mart putting pressure on certain segments of the grocery industry.

6)      The company could use its large cash balance for bad acquisitions.

I believe these fairly material risks are offset by the positive short-term momentum and the intermediate-term catalyst. If Insignia can take advantage of the vacuum left by Valassis, the company’s long-term earnings power would increase which would result in a substantial jump in its stock price. 

Disclosure: I am long ISIG.

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Until early 2014, grocery store in-aisle advertising space was a three player game. News America was by far the largest followed by Valassis and Insignia. Valassis was acquired in 2013, and the new owners decided to shift Valassis away from the in-aisle advertising space. 

The move creates a significant opening for Insignia which had already been ramping up its sales force significantly. Additionally, the company’s new sales chief has experience with both Valassis and News America.

 
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