Friday, June 15, 2012

A sleepy company to keep on the radar

Chicago Rivet and Machine is what I'd call an in between company, they're trading slightly above net current asset and slightly below book value, and at about an average P/E.  At this price I don't see something worth investing in, but that doesn't mean they're not worth researching.  The company's shares can be volatile, and an observant investor might be able to pick them up at NCAV and ride them to book value.  The goal of this post is to familiarize myself with this company so if the opportunity does arise to buy low I can quickly refer to this research, update it and pull the trigger.

Background

The company was founded in the 1920s and manufacturers fasteners and rivets for the automotive industry.  The company also manufacturers riveting machines as well as provides design and engineering, and maintenance services for their machines.  The company's fortunes are closely linked with the auto industry so in years when cars are selling fast CVR is doing well, and conversely when cars are sitting idle on the lot such as in 2008 and 2009 the company is recording losses.

The company has locations in Illinois, Iowa, Michigan and Pennsylvania, in total 221 people are employed across all of the locations.  Manufacturing takes place in the Iowa and Pennsylvania locations, the corporate headquarters is in Naperville, IL.

The industry landscape is competitive with cost pressures coming from rising raw material costs, and the inability to set pricing with customers due to fierce industry competition.  Fasteners are a very generic part, GM or Ford doesn't care if they have a Chicago Rivet and Machine rivet, or one from a competitor, all they care about is the lowest cost.  The company strives to create the highest quality parts for the lowest price which is the only way they will survive in a competitive industry.

The company has no debt and a significant amount of operating leverage like most manufacturing companies.  Small increases in sales can mean large increases in both operating and net income.  The company pays a solid dividend currently yielding 3.2%.

Finances

I have included my net-net worksheet because I think it clearly shows the balance sheet position
Chicago Rivet and Machine has.  They are debt free with almost $6m in cash, which amounts to 33% of their market cap.


As I mentioned in the intro the company is currently trading in between NCAV ($14.43) and tangible book value ($22.49).  Book value has remained extremely steady for the past ten years wavering between $21m and $25m spending the most time at $23m or $24m.  The company isn't compounding book value, they take their earnings, invest enough to keep the business running and pay the rest out as dividends.

Earnings have bounced between a loss of $1.33 a share and $2.69 a share (2002).  Most of the time mid-cycle earnings are in the $1.40-1.60 range, close to where they are now.

Positives

There was a recent insider transaction for 300 shares, a small amount but still a good sign.

The company returns all of the cash they aren't reinvesting in the business each year.  This is good in that an investor gets a cash return, the problem is not a lot of cash is returned, the stock currently yields 3.2%, reasonable, but not a high yielding stock.

The company's management is conservative and appears to be prudent.  They are focused on a strong working capital position, remaining unlevered (both debt and leases) and maintaining a cash reserve.  Having no debt and a lot of cash can be a drag on results in good times, but it allows the company to survive during downturns.  The long history is testament to this strategy.

Negatives

The company earns a very poor return on invested capital.  Using this formula the company earns 2.4% cash return on their invested capital base.  Return on equity was 5.67% last year, and ROE calculated without the CDs on the balance sheet was 7.72%.

This is clearly not a long term holding.  When I pulled up a chart over the past 15 years it appeared an investor could have purchased in the late 90s and sold it for the same price today excluding dividends.  In the meantime an investor would have experienced a wild ride shooting almost to $40 and dropping almost down to $10.  The company's stock price follows the company's fortunes pretty closely, which follow the broad US economy closely as well.

In capex heavy years the company needs to dip into their horde of certificates of deposit to fund capital expenditures.  This means the extra cash should be viewed more as a reserve instead of excess capital.  In most other years capex is paid out of operating cash flow, and the left over cash flow goes to pay dividends.

Summary

In looking at this post there really isn't a whole lot to say about this company, it's a sleepy company in a cyclical industry.  It seems we're chugging towards the peak of the cycle so this is a great company to keep on the radar, but there's nothing to do with it currently.  I would strongly consider buying them on a dip below NCAV which coincides with 2/3 of book value as well.  Until that dip happens I won't be doing anything with Chicago Rivet and Machine except keeping an eye on them.

Talk to Nate about Chicago Rivet and Machine

Disclosure: No position

No comments:

Post a Comment