Description

Integrity is a really neat little niche media company. According to the Christian Bookstore association, they are the largest producer of christian and gospel music. Believe it or not, this is a tremendous and rapidly growing market. According to the CBA, the market for christian media (including books) is over $4BB and has been growing at 7%. ITGR does not sell exclusively to christian bookstores. The broadline retailers (barnes and noble, kmart, etc.) represent a tremendous portion (better than 50%) of the overall market.

Integrity has about $50mm in revenue. It's revenue and FCF (CFFO plus interest less capex and "product masters" - expenditures on music production) have grown at average compound rates of 14% and 60% over the last 5 years (although cash flow is somewhat lumpy). The company has a net cash balance of about $1mm and a FV/FCF of about 5.4x.

Now for the neat part. ITGR is an accouting anomaly. Traditional accounting methods simply don't work with this type of media company. They are able to take advantage of the accounting to produce tremendous cash flow and deferred taxes (unbooked). Here's how: ITGR will record an album for someone like TD Jakes (I don't know who this guy is, but he's apparently pretty famous). They'll capitalize all the recording expenses, artist payments, etc. Then they'll writeoff this asset as fast as they can (usually 6 months to a year). Now they've got a media asst (total library of almost 3000 songs) with a revenue "tail" lasting for several years. This asset is completely unbooked and totally screws up traditional accounting metrics, so you have to do a little digging to see the potential.

An example: over the last 4 years the ROE has averaged about 7%, hardly exciting. However, the cash income return (FCF minus interest) has averaged almost 30% and is steadily increasing. The cash return on total capital has averaged over 20% and continues to increase every year. This scenario should continue as they continue to expand their library and simultaneously writeoff a large portion of the expenses on the front end. This company produces real cash flow instead of accounting income (I've never found much use for the latter).

On top of all this, they had an unbelievable first quarter of over $3.5mm in EBITDA. I'm discounting this pretty heavily though, as the media business tends to come in hills and valleys (they had a huge time life books gospel music hit in the first quarter). They also have a really nice cash cycle as they stretch out the royalty payments to the artists.

Anyway, it's a neat little value situation with tremendous and mostly unrecognized and growing cash flow.

The only real negative I've seen is that the CEO owns a huge voting share position and can do whatever he wants to outside shareholders. The salaries aren't too far out of whack, and the options are a little higher than I normally like, but on the other hand, I really appreciate the fact that they run the company to produce cash and defer taxes. That implies a long-term focus on shareholder return. Hopefully, they'll repurchase shares with the cash after paying off the debt. Also, he must be honest, look at the name of his company...

-pelican

Catalyst

cash flow and unrecognized, off balance sheet media library.