Description
Hi, guys --
I feel a bit guilty about posting this so soon after tim321's excellent writeup, especially since I have so little to add.... But hey! When did feeling guilty ever get a guy anywhere?
Briefly, Reinhold ( http://www.reinhold-ind.com/ ) is a micro-cap mini-conglomerate composed of of nano-cap companies that have something to do with composite materials. It currently makes money from a long-term contract to help keep the MinuteMan III operational, and from a sub in the UK that makes personal and vehicular armor. It's effectively controlled by HKW, a private equity firm ( http://www.hkwinc.com ).
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I'm incorporating by reference tim321's writeup:
http://www.valueinvestorsclub.com/Members/view-thread.asp?id=1374&more=dtrue
, and my response pointing out some negatives:
http://www.valueinvestorsclub.com/Members/view-thread.asp?id=1374&tid=11346
Please read these (and all of the other good contributions) before continuing.
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What's changed since then? IV has hopefully gone up a bit due to the passage of time. There's a glimmer of hope for the airplane seat-back division. And the stock has gotten a lot cheaper.
Let's focus on price and safety.
Price: RNHDA trades at an EV 4.3x TTM EBITDA. That's cheap. And it's cheaper than it seems, since the company is debt-free and thus has no interest expense, pays minimal cash taxes thanks to its substantial NOL's, and is likely to have maintenance cap-ex be lower than depreciation for the next few years. ~9x earnings is also cheap for a company with an unemcumbered balance sheet. And Reinhold has option value for some of its subs that are currently losing money.
Safety: There are tons of cheap stocks out there. It's easy to find over-leveraged US-based auto parts manufacturers at 4x EBITDA. Now, I don't want to overstate the "safety" case. If GE ever decides that it wants to be #1 or #2 in any of the niches that Reinhold is in, well, my money would be on GE. But Reinhold:
A: Is currently making money from divisions that are either stable or likely to grow. Their Aerospace sub looks OK to me; they have a long-term contract for "the replacement of various insulation components for the Minuteman III". Keeping your nuclear missiles working is something that a super-power wants to pay _some_ attention to. They're also involved with the Apache, Patriot and Hellfile systems. Sure, they're doing niche stuff, but it sounds like at least a steady niche, and the level of cap-ex in this division makes me think that future growth is a possibility.
British sub NP Aerospace are the guys making the personal and vehicular armor. Unless terrorism goes away, this business seems likely to grow. Much larger comparable DHB Industries is trading at ~2x sales and ~30x earnings. Applying either of those metrics to NP Aerospace would get you the EV for all of RNHDA.
B: Has decent management. From his shareholder letters, Furry seems like a great guy who's really engaged in the business. Control by a PE firm means that we don't have to worry about grandiose empire-building founders. HKW has been around for a long time; presumably on average they do the right thing. And because they're a PE firm, if they decide to do something underhanded, they've got to ask: "Wait -- if we screw the minority shareholders with this deal, what will that do to our reputation?" Maybe the answer will be, "Who cares?", but at least they've got to _ask_, unlike, say, the gang at CDEN.
C: Their strong balance sheet and diversified revenue streams make financial distress unlikely.
There are tons of "cheap" stocks out there, but most are cheap for some reason. None of these reasons apply to RNHDA. Let's look at the fear factors:
Terrorism? -- A positive for the company.
Rising interest rates? -- No exposure, might actually help the pension fund.
Oil going through the roof? -- No exposure that I know of.
Foreign competition? -- I don't think many MinuteMan maintenance contracts are going to China.
Housing bubble? -- No exposure.
US Consumer giving up? -- No exposure.
Dollar collapse? -- Minimal exposure.
Double dip recession? -- Minimal exposure.
Lying, cheating, promotional management? -- Not here.
The only bad thing I can think of that could happen to these core divisions would be for the MinuteMan contract to be cancelled. But I think that's unlikely, and it wouldn't be the end of the world anyway thanks to the balance sheet and the other revenue streams. Things could also get worse at Bingham, the print-roller sub. I don't see how, but they could. But sooner or later Bingham gets fixed or divested.
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The 10-year bond seems like it's going back to 4%. Here's a debt-free company with stable businesses at an 11% earnings yield and an experienced PE firm to reinvest the proceeds. At these valuations, I don't need organic growth. But I think we're likely to see at least 10% organic growth over the next few years thanks to NP Aerospace and an eventual turn-around in CompositAir, the seatback subsidiary. CompositAir made $2.5MM pre-tax in '99 with a ~30% market share. Management thinks they can get 60% of the market. CompositAir has been in the dumps for years due to the general collapse in aviation. I'm not going to try to call the bottom here, but it's got to be coming fairly soon. BE Aerospace, CompositAir's largest customer, had this to say in their most recent earnings release:
"We expect our revenues to grow solidly during 2005 with an acceleration of revenue and profit growth in 2006 [...] , B/E is poised to deliver to our shareholders strong growth in profitability through 2007."
The market seems to buying the story:
http://finance.yahoo.com/q/bc?s=BEAV&t=3m
-- so maybe the turnaround is imminent.
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So what's the company worth? I'm going to chicken out and just say, "more than it's trading for now", and I expect IV to increase by 15-20% for the next few years.
Yours,
Bowd
Catalyst
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