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  Focusing on a thrifty purchase

BENJ GALLANDER and BEN STADELMANN

Friday, April 4, 2008

Why is that people sometimes conclude The Contra Guys are cheap? Is it because we look at a stock that was once worth, say, $56 (U.S.), and even when it's in the $3 range, we decide it is still too darn pricey? Hey, we bought in at $1.45. That seemed way more reasonable.

Which lovely company was the "focus" of our price limited ardour? Infocus Corp., once a well-known name for its projectors. What turned this once-proud enterprise into a has-been, making the downward slope of the price chart as frightening as a bobsled track, indicating the enterprise could be sluicing straight into Chapter 11? Technological change is at the heart of the story, with the company's products having been surpassed by competitors such as NEC and Sony. Plummeting prices for flat-screen displays also caused the overall market for projectors to shrink.

The thorny competitive environment was reflected in sales, which plummeted from near $882 million in 2000 to slightly more than a third of that last year. Depleting revenue squashed the bottom line, with the last profit registered in 2001. Steady losses drove the book value down from over $9 to the toonie range. Top management threw in the towel, with the CEO and CFO resigning last summer. All was looking as ugly as could be to the majority of investors, so naturally, that attracted us.

Actually, that's an oversimplification. We're not drawn to something simply because it repulses others — there has to be an inner beauty to draw us thither. In this case, it was the cash in the bank — better than $70 million, which can help swathe losses until a turnaround takes hold.

This outfit was selling for less than book, with no goodwill to sully the perception. The loss has been shrinking, and if not for restructuring charges last quarter, black ink would have sprinkled the income statement. Infocus has also refreshed 80 percent of the product portfolio over the past two quarters.

The company's board of directors has been like a virtual Peyton Place. A settlement agreement with the largest shareholder, investment firm Claxton Associates, in February 2007 dictated that if the company did not have a definitive sale, merger or other business combo by April 13, 2007, Claxton could name two members to the board. Since nothing ensued, they did just that and ultimately ended up with four members, or better than half the board.

The enterprise continued to pursue alternatives, but finally, after a protracted effort of almost a year, it concluded in September that the bids received were too low, called off the strategic alternatives process and brought in a new chief executive officer, Robert O'Malley. Apparently fed up, Claxton sold its entire holding of 4.4 million shares at $1.51 per share to Credit Suisse First Boston, near the historical low.

That transaction effectively gave Mr. O'Malley a free hand to take the necessary steps to pull Infocus out of its tailspin. Preliminary results show a move in the right direction.

Our initial sell target on this one is $10.44, where it traded in 2004. If a takeover happens in the next couple of years, it will likely transpire well below this level. Still, it is reasonable to assume that it will be a distance from the current trading price of $2.

Instead of thinking of us as cheap, perhaps thrifty is more appropriate. Of course, one can say that the line between cheap and thrifty is "tight."


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