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Investment Analysis: Rimage (RIMG)

January 06, 2011 | About:
Daily Reckoning

Saj Karsan

21 followers
Rimage (RIMG) provides equipment and software for the mass production of CD and DVD content. For example, if a company wants to distribute training software to hundreds of employees, it may use Rimage devices to efficiently burn and label a bunch of disks.

Rimage trades at $140 million, and has earned operating income of just over $60 million over the last four years. As such, at first glance the company may not look like a steal...until you consider that the company has a cash balance of about $110 million! If you subtract the cash from the company's market cap, the company appears to trade for just $30 million. Meanwhile, it has earned about $10 million in the last 12 months. Now it does look like a steal!

In addition, the company's margins have remained strong (10%+) throughout the recession. One of the reasons for this is the company's variable cost structure. The company outsources the manufacturing of the subcomponents of the systems it sells, so capital investment requirements are low. (The company had depreciation of just over $1 million on sales of $83 million in fiscal 2009.)

But an investment in Rimage is not without some risk either. For one thing, it may not be wise to simply subtract the cash from the company's market cap. Rimage has built up its cash balance over several years. Its buyback program, along with its actions within that program, have been pretty weak considering its cash hoard. Furthermore, the company does not pay a dividend. As such, investors may not see that cash for a while, if ever. (For example, the cash may be squandered in an empire-building acquisition.)

Furthermore, while the company continues to make foreign investments, notably in China, there is some question as to whether this industry will exist in a few years. For example, perhaps the hypothetical company depicted in the opening paragraph of this post will distribute its training video over the company intranet rather than by physical media. As broadband infrastructure continues to grow, Rimage's industry is at risk. As such, the company's revenue and margin contraction of the past three years may only be part cyclical, with the other part being secular.

Despite the strong cash balance and steady operating nature of this company's earnings, there are risks going forward which could impact Rimage's intrinsic value. Investors should be sure to understand and weigh these risks carefully before jumping in.

Disclosure: None


Saj Karsan

http://www.barelkarsan.com

Rating: 4.2/5 (5 votes)

Comments

jhodges72
Jhodges72 - 3 years ago
There is a lot of competition in this industry. I know this particular industry very well and wouldn't touch it. However, it was a good write up and idea. CD's will be phased out eventually and the costs to produce a CD is ever decreasing which is opening the doors to increased competition. You can purchase a CD duplicator machine for $600 that will burn 7 CD's per minute. This isn't an industry in high demand.
softdude2000
Softdude2000 - 3 years ago
Simple and very good analysis about risk.

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