I came across Rimage Corp with one of my deep value screens. While it doesn’t quite represent a deep value opportunity along the lines of Graham’s Net-Net, I do believe it offers potential upside without a great deal of downside risk. The market cap is at about $139 million and total assets of $135 mil with minimal debt. The company offers over $11 in cash and securities on its balance sheet (stock currently at $14.90 as of this writing) with almost no debt. Rimage has historically been able to sustain high levels of return on capital - even with an overly capitalized balance sheet. There is a real possibility that ROC may never return to historic levels as demand for their legacy products diminish. However, at first glance, it appears the product line enjoys a profitable niche. The tremendous amount of annual free cash flow allows the company to invest in new extensions with better growth prospects. Of course, there is always the risk management will invest poorly. Certainly we have seen overcapitalized businesses waste shareholder funds with other businesses. The capital structure is very non-capital intensive with fixed assets at approximately 4% of total assets (including no intangibles on the balance sheet).
I believe that any return to top-line growth, even modest growth, might result in a doubling of stock price from current levels. That being said, there are definitely some risks to the story (see below).
Company Description:
Rimage Corporation (Rimage) is a provider of digital publishing systems that are used by businesses to produce recordable compact disc (CD), digital versatile disc (DVD) and blue laser discs with customized digital content on an on-demand basis. Rimage’s publishing systems, which include equipment to handle a range of low-to-high production volumes, incorporate robotics, software and custom printing technology for disc labeling. Rimage focuses its digital publishing solutions on a set of vertical markets with special needs for customized, on-demand digital information, including digital photography, medical imaging and business services. Rimage’s digital publishing systems have been divided into two primary product lines: the Producer line of equipment for higher volume requirements for production of recordable CD, DVD or blue laser media, and the Desktop line of products for office and other desktop applications.
Financials:
Book Value/ Share | Debt/ Equity | Return on Equity (%) | Return on Assets (%) | Interest Coverage | |
12/08 | $11.68 | 0.00 | 8.6 | 7.6 | NA |
12/07 | $10.82 | 0.00 | 15.0 | 12.6 | NA |
12/06 | $9.62 | 0.00 | 13.7 | 11.6 | NA |
12/05 | $7.95 | 0.00 | 14.9 | 12.8 | NA |
12/04 | $6.70 | 0.00 | 14.5 | 12.2 | NA |
12/03 | $5.71 | 0.00 | 14.7 | 12.6 | NA |
12/02 | $4.83 | 0.00 | 15.3 | 13.3 | NA |
12/01 | $4.08 | 0.00 | 13.6 | 11.9 | NA |
12/00 | $3.58 | 0.00 | 26.6 | 22.6 | NA |
Valuation:
Discounted cash flow analysis – Assuming no growth over the next ten years still puts the projected price below current market value. High margin of safety.
Free Cash Flow yield = 27% (based on enterprise value and estimating the company will do approximately $10 million in FCF for 2009).
Risks:
[list]- Product obsolescence.
- Thinly traded stock.
- Potentially ineffective capital allocation.
- Margin and pricing pressure.
Disclosure: Author owns no shares
