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George Risk Industries: Cash-Rich, Low Risk and Profitable

December 08, 2012 | About:
This is one in a series of articles where I will be covering most of the 30 Obscure, Profitable Stocks listed by Geoff Gannon on his blog on Nov. 29, 2012. Many thanks to Geoff Gannon for the wonderful list of interesting stock ideas.

Incorporated in 1967, George Risk Industries Inc. (RSKIA) is engaged in the design, manufacture, and sale of computer keyboards, push button switches, burglar alarm components and systems, pool alarms, thermostats, EZ Duct wire covers and water sensors. Its security burglar alarm products comprise approximately 88% of net revenues and are sold through distributors and private board customers.

Valuation

RSKIA is currently trading at a trailing twelve months P/E of 15.32 and a trailing twelve months EV/EBITDA of 2.91. In terms of asset-based valuations, it is currently valued at 1.15x P/B and 1.19x P/NCAV. RSKIA achieved a 7.7% ROE for the past twelve months and a five year average ROE of 6.5%.

Financial and Business Risks

RSKIA is debt free with net cash of $26.9 million representing 76% of its current market capitalization of $35.3 million. Of the $26.9 million, $20.3 million was invested in money markets, equity securities, corporate bonds and municipal bonds. It appointed an independent third party firm and gave it permission to buy and sell stocks at will.

Honeywell, RSKIA's largest customer accounted for 41% of its sales in fiscal year 2012. RKSIA has a long working relationship with Honeywell and it obtained a written agreement with Honeywell in February 2011.

RSKIA's products are tied to the housing industry and will fluctuate with building trends.

Business Quality and Capital Allocation

RSKIA is profitable, with a positive free cash flow for every single year in the past decade, flowing in 8 out of the past 10 years. Gross margins and operating margins have been consistently above 45% and 14% respectively for the past decade.

RSKIA has paid dividends every single year since 2007 and currently sports a dividend yield of 4.0% with a dividend payout ratio of 50%. On Dec. 6, 2012, RSKIA announced that it will pay out a special dividend of $0.22 per share. On Sept. 18, 2008, its board of directors approved an authorization for the repurchase of up to 500,000 shares of RSKIA's common stock. RKSIA bought back 8,425 shares and 17,505 shares in fiscal year 2012 and 2011 respectively. There are still approximately 362,000 shares available to be repurchased under the current resolution.

Conclusion

About $8.9 million in equity securities represented 33% of RSKIA's net cash of $26.9 million, which is the most 'risky' part of the cash. Notwithstanding this, it is always a very attractive proposition to buy a profitable and free cash flow positive company at valuation levels close to net cash.

Disclosure

The author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap deep-value cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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