The FedEx of Digital Content

By Michael Brush
March 30, 2006

If you produce video content that absolutely, positively has to get there on time, you turn to FedEx right?

No way. Instead, you are more likely call a tiny Burbank, Ca.-based company called Point.360 (PTSX). In a digital age when time goes by too fast for TV producers and advertisers just like the rest of us, Point.360 helps media moguls meet their deadlines.

Besides zapping high-definition (HD) versions of programs like ABC’s Desperate Housewives to Canadian broadcasters, Point.360 helps producers put the finishing touches on their product, convert it to new formats, and archive it safely.

The company also restores old video content so it is more presentable in high definition – making it harder to see telling details like suspension wires that would otherwise catch your attention in HD format.


Big insider bet

In late March Point.360’s chairman and chief executive Haig Bagerdjian plunked down $220,000 to buy another slug of his stock at $2.20. That brings his position – accumulated over the years through open market purchases, private transactions and options – to 2.9 million shares, or an impressive 29.7% of the company.

What’s going on here to explain this kind of conviction? “I believe in the future of the company. We are about to turn a corner,” says Bagerdjian.

Bagerdjian took over leadership of Point.360 two years ago when the company faced at least two big problems. It had been doing a lot of acquisitions of companies in its field, and they weren’t integrated. Next, the company had a huge debt load. “I thought with my management skills I could integrate the company and pay down the debt,” says Bagerdjian.

A work in progress

Bagerdjian inked a $10 million five-year term loan agreement with the General Electric Capital division of General Electric (GE) last January. Now the company is working on selling a building that came into the fold with one of its purchases. That should bring in another $10 million.

Reducing debt will improve profitability and make the stock more palatable to investors. Right now Point.360 has an enormous $19 million in debt, a burden that almost rivals its market cap of $23 million. At least the company brings in a lot of revenue – or about $64 million a year.

Besides shedding debt, Bagerdjian is working on getting out of lower margin businesses and taking on assignments that bring higher profits.

For example Point.360 used to distribute content for an ad agency serving BMW Group. But Point.360 moved up the food chain and began working for BMW itself, taking on additional responsibilities like “tagging” and archiving along the way. “Tagging” is when editors add the section on the end of a car ad that refers viewers in a national ad campaign to their local dealers. “We went upstream to work with the brand owner and expanded the service offering,” says Bagerdjian.

To deliver HD versions of Desperate Houswives on time for ABC, Point.360 developed a proprietary pipe that could handle the bigger HD content files without compromising quality.

And as more and more content converts to HD, and more players – like the phone companies – move into sending digital entertainment into the home, the need to quickly zap rich, digital content to distribution points will only increase. Another layer of complexity will arrive as consumers download more digital content to their hand-held devices like cell phones.

“When I look at what kind of requirements are put on studios and the content creators and the speed at which they have to get to market, I think we are sitting on a nice wave,” says Bagerdjian. “As time is compressed for our customers and the complexity increases, that forces them to look outside their four walls to specialists like us to meet their deadlines.”

In short, you can look at this company as an undiscovered play on the HD and digital content trend.

The bottom line: One problem is that Point.360 is so small and unknown – Thomson Financial lists no analysts following the stock -- it may take a while for the market to catch on that it is a turnaround. The good news is you can rest assured that you aren’t overpaying for the stock, in the meantime. Not only has management been buying near current levels, but the stock trades for around half of book value and a third of sales. That’s the kind of bargain you won’t often find in Hollywood, a culture better known for its extravagances. I’d buy shares right here and be prepared to wait, as usual with insider buying names, for the stock to advance.

Disclaimer

At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.

For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.