Normally with the long-term value conservative investor, technology is too sexy industry to consider. But if they look twice at Rimage, at this price, the bargain is just screaming at them. Let’s have a deeper look inside this micro cap technology company.
Rimage is a provider of workflow-integrated digital publishing systems, used by businesses to produce recordable CD, DVD and Blu-ray Discs™ with customized content and durable disc labeling.
Founded in 1987, the focus of the business has shifted several times to catch up with new trends in technology.
|Founded and focus on digital storage production equipment||Development and sale of its CD recordable (CD-R)||DVD recordable (DVD-R) publishing systems||Blu-ray capabilities were integrated into key products to address the storage capacity needs|
Rimage is a technology-driven company, so one of the key success factors is innovations of new products and new technology in order to stay competitive. So far, qualitatively speaking, it has successfully caught several “waves” of technology trends from CD to DVD to Blu-ray technologies.
It has its own manufacturing operations, consisting of the assembly of products from components purchased from third parties. Components include DVD-R drives, Blu-ray recorders, printers, circuit boards, electric motors, precision sheet metal assemblies, computer components and other mechanical parts.
For distribution, it has distributors to resellers in Europe, the U.S. and Latin America; a distributor or OEM to end-user distribution channel in Asia Pacific, some areas in Europe and some U.S. market applications; and direct sales to select accounts using its own sales force.
The majority of revenue is generated through sale of Rimage-branded blank recordable CD, DVD and Blu-ray media, ribbons, ink cartridges, parts, repair services and maintenance contracts. These parts of revenue which are considered recurring comprise around 54-60% of the total revenue. This recurring revenue will prove to be strong, unless there are any further new changes in technology or the company cannot catch up with the new trend. But so far, historically, the company has shown the ability to do so.
Looking at the performance of the company over the last 10 years from 2001, every metrics looks decent. The company has 10 year of profitability, no year showing losses, all 10 years showing positive free cash flow, and working capital as well as book value keeps increasing overtime. Buffett has noted that over the long run, the changes in book value are rough metrics for the changes in the intrinsic value. Its per-share book value runs from $3.71 to $13.35 in 10 years, showing the compounded annual growth of 13.7% per year.
Looking at the income statement, in terms of percentage, the operating income averaged around 16% of total sales (varied from 13-20%), net margin stays around 12%, (varied from 9-12%), and it does not show a lot of variation for the operating expense (including SG&A, R&D).
Looking at the most current balance sheet (March 2011), it has total cash of $109 million consisting of cash and $9 million in short-term investments, virtually no long-term debt, with the market capitalization of $136.8 million (dated May 23, 2011). The enterprise value of the company only stays around $19 million. The contractual obligation (including operating lease), which is off-balance sheet, is total more than $1 million, so it’s considered to be small and the investors don’t need to worry about it.
Rimage doesn’t require significant capital investment, as all fabrication of its products is outsourced to vendors. And it has impressively shown the free cash flow is positive for at least 10 years from 2001. Trailing FCF for Rimage stays at around $14 million, so the FCF yield is at 73%.
There are always some risks involved. Of course, there is the biggest risk inherent in almost every technology company, that the industry changes very fast, and no long-term investor can be certain of who will enjoy the benefits. When DVD and Blu-ray is out of date, and if the company does not keep pace with the new trend in technology, the decent performance in the past would no longer exist. However, with the company full of cash and having a light amount of debt, it will be very flexible and adaptable to change, even its business model. Secondly, the small investor has to rely on the management’s and board's decision to enhance the value for shareholders via acquisition for more future growth or pay special dividends as the company gets a lot of cash on its balance sheet.
This stock at this price is definitely a safe asset play currently, and it will be good in a portfolio including other industries so that the investor can still get the diversification shield.
Disclosure: The author currently owns Rimage shares.
Anh HOANG (Tuc)