George Risk Industries RSKI.A
January 14, 2009 - 10:29pm EST by
rskfrarb210
2009 2010
Price: 4.00 EPS $0.43 $0.28
Shares Out. (in M): 5 P/E 9.1x 14.5x
Market Cap (in $M): 21 P/FCF 12.9x 15.1x
Net Debt (in $M): -19 EBIT 3 2
TEV (in $M): 2 TEV/EBIT 0.7x 0.8x

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Description

I'm always looking for very cheap places to put cash.  I believe George Risk Industries is such a place.

George Risk Industries (RSKI.A) is a cheap company with great margins, a high ROIC (adjusted for excessive capitalization), and no discernable competitive advantage.  The company has three segments: pool alarms, keyboards, and security alarms.  'Security alarms' includes burglar alarm components and systems, has 4000 customers, and makes up 90% of revenues.  The company is exposed to one customer making up "approximately 42%" of sales but consider that this customer also comprised 41.9% of sales in 1997.  Despite being 'intensely competitive', the security alarms segment generates 25% operating margins, since the company focuses on small customized orders that aren't scalable and efficient for larger competitors.  Within this niche the company has generated stellar ROICs:

RETURNS ON INVESTED CAPITAL (ann)
















in (000)'s
30-Apr-08 30-Apr-07 30-Apr-06 30-Apr-05 30-Apr-04 30-Apr-03 30-Apr-02 30-Apr-01 30-Apr-00 30-Apr-99














NOPAT
























Sales


11,444 13,419 14,254 13,113 12,783 12,895 12,831 13,914 13,485 13,078
Operating margin

24.6% 27.3% 28.8% 27.7% 26.8% 26.0% 21.6% 22.4% 23.9% 22.5%














Opearating profit

2,813 3,659 4,099 3,637 3,429 3,359 2,769 3,115 3,221 2,944
Less: cash taxes paid

1,567 1,350 1,991 1,384 1,568 1,459 1,313 1,288 1,535 1,132




                   


NOPAT
1,246 2,309 2,108 2,253 1,861 1,900 1,456 1,827 1,686 1,812














Less: incremental capex
176 82 335 158 191 84 184 149 653 244
Less: incremental W/C, adjusted
(300) 620 91 105 140 (404) (361) 169 400 903




                   


Free Cash Flow
1,370 1,607 1,682 1,990 1,530 2,220 1,633 1,509 633 665




                   
Invested Capital
























Total assets

28,055 26,733 24,161 21,643 19,195 16,665 15,184 14,317 12,895 10,923
Less:












Cash and cash equivalents
4,342 5,053 5,473 4,866 3,490 1,897 1,798 1,730 1,059 1,032
Marketable securities

17,136 15,275 12,781 11,258 10,224 9,185 7,453 6,428 6,052 4,964
Non-interest bearing current liabilities 626 589 544 472 414 384 422 428 435 538




                   




22,103 20,917 18,798 16,596 14,127 11,465 9,673 8,586 7,545 6,533




                   


Invested capital
5,952 5,816 5,363 5,047 5,069 5,200 5,511 5,731 5,350 4,390




                   
ROIC
























Return on Invested Capital
23.0% 27.6% 31.4% 39.4% 30.2% 42.7% 29.6% 26.3% 11.8% 15.1%














 

These ROICs are currently priced very cheaply with RSKI.A currently trading at only 1.2x Free Cash Flow.  I'm defining FCF here as:

Operating Profit

- Cash Taxes

- Incremental capex

- Incremental working capital

= Free cash Flow

 

VALUATION




Total Enterprise Value




Price

$4.00/share
Shares

5,176
MCAP

20,703
Net debt/cash:

Cash and cash equivalents 3,376
Municipal bonds
8,037
Federal agency MBS
375
Corporate bonds
399
Equity securities
5,193
Money markets/CDs
1,588



 



18,968
Preferred stock
82



 


TEV 1,817




Free Cash Flow multiple




TEV

1,817
Free Cash Flow, 10-year average 1,484



 

  Free Cash Flow multiple 1.2x




 

 

I find 1.2x FCF a modest price to pay for the following ROICs:

Historical ROICs




Prior 10-years average ROIC 27.7%
Prior 5-years average ROIC 30.3%
Prior 3-years average ROIC 27.3%
Prior 1-years average ROIC 23.0%




 

Risks:

- Chairman/CEO/Founding Son Ken Risk holds more than 50% of the stock.

Other risks are those typical of microcaps with significant non-core assets, including:

- Destruction of the net cash balance

- Lack of competitive advantage leading to unsustainable business

- Continued drawdown on the marketable securities

- Significant illiquidity in the stock

 

 

 

Catalyst

- Potential annual cash build nearly equal to current TEV

- Improvement in the marketable securities portfolio

- Continued payment or increase of the annual dividend, currently yielding 4.25%




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