COMPX INTERNATIONAL INC CIX
March 06, 2016 - 1:01pm EST by
gocanucks97
2016 2017
Price: 9.92 EPS .70 0
Shares Out. (in M): 12 P/E 0 0
Market Cap (in $M): 123 P/FCF 0 0
Net Debt (in $M): 52 EBIT 14 0
TEV ($): 71 TEV/EBIT 4.7 0

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Description

This is a PA idea. The stock was written up here on VIC almost 2 years ago, and has been flat even though company fundamentals have been decent and generated FCF over 15% of market cap. http://www.valueinvestorsclub.com/idea/COMPX_INTERNATIONAL_INC/118907

 

The thesis is fairly straight forward. CIX is a good business selling at attractive valuations (5x EV/EBIT, 8x PE/FCF ex-cash). By year end 2016, close to 50% of market cap will be in cash, which should provide downside support. The industry is very fragmented with the top players extremely acquisitive. Using recent industry transaction multiples, CIX could easily fetch a double in a sale.

 

CIX has two operating divisions: Security Products (locks) and Recreational Marine Products. Marine segment does about $13m revenue at marginal profitability, so most of the value is in Security Products. Selling locks is not a sexy business, but as the model below shows, it has generally been a steady-eddy type of business with modest topline growth but very stable margin and attractive returns over a long history. CIX generates around 25% ROTCE (ex $24m goodwill associated with security division acquisitions made over 15 years ago). Underlying economics are even more attractive, as there is a relatively large corporate overhead of $6m (top three officers pull in over $2m compensation, public company costs, marine etc). D&A is the same as capex, so FCF closely tracks net income. CIX pays a 2% dividend, and cash has been building up. Revenue growth in last 3 years have been very strong, easily outpacing publicly traded peers. Mgmt did point out there was a $5m one-time order by USPS that will not be repeated going forward, hence I am modeling a modest decline in 2016. There is a bit of revenue concentration risk with USPS/Harley Davidson accounting for 13%/12% of revenue, but the rest of the business is fairly diversified.  

 

  2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E
Sales                        
  Security  76.7 81.7 80.1 77.1 61.4 68.0 71.4 73.7 81.5 91.5 95.6 91.0
     yoy % 1.1% 6.5% -2.0% -3.7% -20.4% 10.7% 5.0% 3.2% 10.6% 12.3% 4.5%  
  Marine 4.1 15.4 16.3 12.0 6.5 8.2 8.4 9.5 10.5 12.4 13.4  
Total 80.8 97.1 96.4 89.1 67.9 76.2 79.8 83.2 92.0 103.8 109.0  
     yoy %   20.2% -0.7% -7.6% -23.8% 12.2% 4.7% 4.3% 10.6% 12.8% 5.0%  
Gross Profit                      
  Security  22.1 23.9 24.1 21.7 17.8 21.6 23.1 23.0 25.8 29.5 29.9  
     % 28.8% 29.3% 30.1% 28.1% 29.0% 31.8% 32.4% 31.2% 31.7% 32.2% 31.3%  
  Marine 0.9 3.7 4.4 2.5 (0.5) 0.9 1.0 1.3 1.8      
  Total 23.0 27.6 28.5 24.2 17.3 22.5 24.1 24.3 27.6 31.2 33.4  
Op Income                      
  Security  13.1 14.6 12.2 12.7 9.7 13.1 14.4 14.1 16.1 18.7 18.6 18.0
     % 17.1% 17.9% 15.2% 16.5% 15.8% 19.3% 20.2% 19.1% 19.8% 20.4% 19.5% 19.8%
  Marine 0.5 0.8 0.8 (10.4) (3.0) (1.4) (1.2) (0.8) (0.1) 0.7 1.4 1.5
  Corp exp (5.5) (5.2) (5.4) (5.3) (6.0) (5.8) (6.8) (7.9) (6.7) (5.8) (6.0) (6.0)
EBIT 8.3 10.4 7.8 (2.8) 0.9 6.1 6.6 5.6 9.5 13.6 14.0 13.5
    % 10.2% 10.7% 8.0% -3.2% 1.3% 8.0% 8.3% 6.7% 10.3% 13.1%    
Net Income               6.2 8.8 9.1 8.8
EPS                 $0.50 $0.70 $0.73 $0.70
FCF/share               $0.46 $0.75 $0.75 $0.69
Cash               34.3 38.7 45.6 52.3 59.1
ROTCE ex cash                 21.1% 21.8% 20.0%

 

  2015 2016      Take-out
Stock Price $9.9 $9.9 $18.0
# shares 12.4 12.4 12.4
Mkt Cap $122.8 $122.8 $223.2
Net Cash 52.3 59.1 59.1
Cash/share $4.2 $4.8  
Cash % mkt cap 43% 48%  
EV $70.5 $63.7 $164.1
EV/EBIT 5.0x 4.7x 12.2x
EV/Secuirty EBIT 3.8x 3.5x 9.1x
P/E ex-cash 7.8x 7.3x 18.9x

 

Valuation is attractive on a stand-alone basis. However, the company is likely worth a LOT more in a sale. The industry is very fragmented, with the top 3 players Assa Abloy, Allegion (spin-off from IR), and DormaKaba (recently merged) having less than 10% of market share each. With low organic growth (2-3%), these companies use M&A to drive a significant part of their growth and justify their premium valuation (high teens P/E and EV/EBITDA). For example, AA has a corporate goal to deliver 4-5% topline growth via M&A routinely paying 10-12x EBIT, and its successful track record has made it a perennial favorite among European industrial space. Not to be outdone, Allegion (armed with a low corporate tax rate due to Irish domicile) pulled off 7 acquisitions in just 2 years since the spin, including three last summer. CIX's reported financials compare quite favorably to the two bigger deals done by Allegion (AXA Stenman & SimonVoss, both doing around $60m sales), where Allegion paid 3-4x sales and low teens EBITDA multiple. On just 9x security division EBIT, CIX could fetch $18.

 

Now comes the crux of the story. What will the controlling Simmons Family do with CIX? For background, famed investor Harold Simmons has control of CIX, through convoluted cross ownership of various publicly traded entities VHI, NL, KRO and VIX. Mr. Simmons passed away at end of 2013, and his estate is now controlled by his wife and two daughters. I have no idea what the family plans to do, but there are a few points that make me more hopeful. 1) The family does not appear to rule out sale of businesses -- Simmons sold Titantium Metals in 2012, CIX sold its money losing furniture business in 2013, and VHI sold its main environmental business just last December. So now the family is down to just two main operating businesses -- CIX and Kronos (a TiO2 player). 2) NL, which owns 87% of CIX and 30% KRO, has various environmental liabilities and a significant contingent liability related to its past operations in lead paint. Along with Sherwin Williams and ConAgra, NL was ordered to pay $1.1B in a California case in Dec 2013, which is under appeal. TiO2 is currently experiencing serious global over-supply with KRO operating in the red. In an adverse scenario, the easiest way out for NL to pay is to sell CIX, for which there should be plenty of eager buyers. 3) CIX's CEO is 78 years old and has been in the position for almost 40 years.

 

In summary, investors get to own a decent business at 10%+ FCF/EV with cash building on the balance sheet, while waiting for a seemingly inevitable sale. Seems like a decent risk/reward.

 

 

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

Catalyst

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