|Shares Out. (in M):||5||P/E||0||0|
|Market Cap (in $M):||41||P/FCF||0||0|
|Net Debt (in $M):||-30||EBIT||0||0|
George Risk Industries (RSKIA) is a capital-light operating business attached to a pool of cash and securities that is managed sub-optimally but at least not recklessly. After backing out $5.94 in excess cash and securities, the operating business trades at 2.6x/4.7x/4.3x LTM EBITDA/EPS/FCFE.
Nearly 95% of the Company’s revenue comes from security burglar alarms sold through third party distributors and dealers/installers, and there is no reason to think Risk’s other product lines (computer keyboards, push button switches, EZ water duct covers, etc.) will meaningfully add or subtract value. Unlike ADT/Ascent, George Risk does not recognize monthly recurring revenue from customer accounts, but rather designs and manufactures the alarm components and systems. The Company’s business is cyclical and non-recurring hardware sales, tied to residential housing starts. The founding family/management owns nearly 60% of the stock and relies on the Company’s 4.3% dividend for income, so if you’re looking for a momentous value-unlocking event, you won’t find it here. Still awake? It gets duller, don’t you worry.
For a cyclical electronics components manufacturer, Risk seems like a decent business. After nearly a decade of flat pricing, the Company successfully implemented price increases in 2011, 2012 and 2014 and has demonstrated lofty margins and returns over time, remaining profitable through 2008/2009. Furthermore, the Company’s counter-cyclical working capital swings have cushioned operating and free cash flow in downturns.
NOPAT: Operating EBIT x (1-tax rate)
Operating Assets: Total assets minus cash and investments
Capital Allocation / Management
Management’s capital allocation preferences are as pedestrian as the business it operates. The Company has generated $23.3mn in reasonably consistent free cash flow (OCF – capex) over the last 10 years. $10.7mn of this has gone to paying common dividends, $1.8mn has been spent on repurchases and the rest of it has been hoarded:
Expect no miracles on capital allocation – this is a closely held family entity whose primary objective is supplying income through dividends. That said, management and Board is paid rather modestly, with outside directors receiving $150 each in annual fees and the CEO earning $154k in total comp ($37k base salary).
(the Company bears the name of its founder who started the Company in 1965; when he died in 1989, his son took over as CEO and when HE passed away in 2013, his daughter, who was serving as CFO at the time, also assumed the CEO role)
Customer concentration is the biggest risk to the operating business. One distributor, ADI (a Honeywell division), accounts for 41% of total revenue. I have no special insight into this relationship, but I think the following are worth mentioning:
1) It seems that ADI has been a customer for at least a decade
2) On revenue growth/margins/balance sheet strength, Honeywell and I’m guessing the $9bn division that buys from RSKIA seem to be doing just fine
3) At ADI’s beckoning, in February 2011, Risk struck a new vendor agreement with ADI. The agreement calls for lowest pricing and fastest payment terms, and while not privy to the numbers, we can impute that payment terms got substantially worse:
That said, the first pricing hike in a decade was roughly coincident with the vendor agreement and based on the discontinuous profit jump (EBIT margins in the Security Alarms segment went from 14% in FY10 to nearly 30% in FY12), it seems logical to conclude that ADI got hosed along with everyone else. So, perhaps RSKIA traded cash conversion speed for profitability? ADI is clearly important but the Company’s relationship with ADI appears sanguine….and even if ADI revenue evaporated completely, RSKIA would still be marginally EBIT-profitable (assuming 65% gross contribution margin and no opex cuts).
Outside of ADI, DSOs have meaningfully improved over time. Other balance sheet metrics show similar improvement or stability:
The largest component of the $5.94/share in excess cash and marketable securities on the balance sheet is $3.00+ of equities. Over the last 5 years, the equity proportion of investments has increased from ~32% to ~63%, both from unrealized gains and active reallocation, particularly away from muni bonds. Based on a loose visual reconciliation of securities sold/bought reported in the cash flow statement and changes in asset class allocations, there appears to be very little turnover in the equity book, reflecting a buy-and-hold posture. Outside of the Company’s description that these are “quality stocks,” I have no clue. For now, I’m just assuming these are dividend paying US blue-chips but I’ll let you know if that’s not the case if/when I get a hold of someone at the Company.
Taking cash and securities at face value, here’s where things shake out:
RSKIA’s operating business currently trades at 4.3x/4.2x LTM and 10-year average FCFE. George Risk is not a great business but nor is it in rapid secular decline, as current multiples would suggest. 10x 10-year average FCFE translates to $4.64 for the operating business + $5.94 cash/investments = ~$10.50+. That may not sound so sexy, but I think downside, which I arrive at through a totally unscientific but ostensibly onerous liquidation scenario, seems reasonably moored. If cash flows remain as stable as they’ve been over the last decade and the stock price keeps up with cash accumulation of $0.25/share/year (consistent with the last 10-years), that works out to 3.2% capital appreciation + 4.3% dividend yield = 7.5% shareholder annual return.