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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