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CompX International: Choice Between a Special Dividend and a Fresh Punt
Posted by: Mark Lin (IP Logged)
Date: January 30, 2013 09:43AM

Incorporated in Delaware in 1993, CompX International Inc. (CIX) is a leading manufacturer of security products, precision ball bearing slides. It is also a leading manufacturer of stainless steel exhaust systems, gauges, and throttle controls for the performance marine industry, which is currently only a small part of CIX's business. CIX's products are principally designed for use in medium to high-end product applications, where design, quality and durability are valued by customers.

On Dec. 28, 2012, CIX announced that it had completed the sale of its Furniture Components operations, conducted at its facilities in Kitchener, Ontario, Canada and Taipei, Taiwan, to Knape & Vogt Manufacturing Company for approximately $59 million in cash. CIX's Furniture Components operations represented $46.4 million in sales out of consolidated sales of $110.2 million for the first nine-month period ended Sept. 30, 2012. Its Furniture Components operations manufactured ergonomic computer support systems used in the office furniture, transportation, postal, tool storage, appliance and a variety of other industries.

Insider Insights
In 2012, Harold C. Simmons and David Bowers, vice chairman, president and CEO of CIX, bought approximately 6,000 shares in aggregate, at prices ranging from $11 to $12.

Valuation and Financial Analysis
CIX currently trades at a trailing 12 months P/E of 24.1 and a trailing 12 months EV/EBITDA of 10.1. Its current asset-based valuations at 1.98x P/B and 3.38x P/NTA represent premiums of 34% and 41% over their respective five-year average values. CIX achieved a trailing 12 months ROE of 8.4% and a five-year average ROE of 3.0%.

Note that the numbers above have not been adjusted to take into account the sale of its furniture components operations.

CIX Historical P/B and P/NTA Chart

CIX Historical EV/EBITDA Chart

CIX was free cash flow positive in 9 of the last 10 years and delivered positive operating cash flow positive in every single year in the past decade. Its profitability track record is less impressive, with three years of losses from 2002 to 2011. CIX's gross margin has expanded in the last decade, increasing from 17% in 2002 to above 25% in 2010 and 2011. Current gross margins and operating margins are close to their ten years high for CIX.

CIX Earnings-Cash Flow Chart

CIX Profit Margins Chart

Financial and Business Risks
CIX has a strong balance sheet with a low gross debt-to-equity ratio of 25% and a net gearing of 17%. The credit position is further strengthened by an interest coverage ratio of 13.

CIX Cash-Debt-Market Capitalization Chart

CIX has limited free float. As at Dec. 31, 2011, NL Industries Inc. (NL) owned 87% of CIX's outstanding common stock; Valhi Inc. (VHI) holds approximately 83% of NL’s outstanding common stock; and subsidiaries of Contran Corporation hold approximately 95% of VHI's outstanding common stock. Substantially all of Contran's outstanding voting stock is held by trusts established for the benefit of certain children and grandchildren of Harold Simmons, the sole trustee, or is held directly by Simmons or other persons or entities related to him.

CIX's profitability is affected by the price volatility of its key commodity-related raw materials. Coiled steel is the major raw material used in the manufacture of precision ball bearing slides; zinc and brass are the principal raw materials used in the manufacture of security products; and stainless steel tubing is the major raw material used in the manufacture of marine exhaust systems.

Business Quality and Capital Allocation
CIX continuously seeks to diversify into new markets and identify new applications and features for its products, which provide a greater potential for higher rates of earnings. While the acquisition of a new Furniture Components ergonomic product line and the reduction of the footprint of its Furniture Components manufacturing operations from three facilities to two in 2011 did not pay off,

CIX continued its efforts in the security products and marine segments. CIX grew operating income for the security products segment by 10% on the back of a 5% increase in sales, as new products gained acceptance in the marketplace with customers, such as new mechanical lock applications offering a more secure environment for the distribution of gasoline. CIX is also attempting to penetrate into the broader marine industry with several new products, to offset the lackluster performance of the powerboat market.

CIX believes that it is a North American market leader in the manufacture and sale of cabinet locks and other locking mechanisms. It is the manufacturing umbrella for the former National Cabinet Lock, Fort Lock, Timberline Lock and Chicago Lock brands which have more than 200 years of history in the security industry. CIX produces a range of locks, from the low-end disc tumbler locks which provide moderate security and are the cheapest to produce, to high-end electronic locks which provide stand alone or networked security and audit trail capability for drug storage and other valuables The locksmith distribution channel is a key reason why CIX has a significant North American market share of cabinet lock security product sales. CIX support its locksmith distributor sales with a line of standardized products used by the largest segments of the marketplace, which are packaged and merchandised for easy availability and handling by distributors and end users.

CIX has paid quarterly dividends of $0.125 in every single year since 2000 and currently sports a dividend yield of 3.6%.

CIX Dividend Yield-DPS Chart

The cash from the sale of its Furniture Components operations and its consistent cash flow generation should keep CIX's dividend intact. On a historical dividend yield valuation analysis, CIX appears to be fairly valued. The biggest question mark is CIX's plans going forward. Is CIX going to focus on its existing security products and marine business and pay out a special dividend? Or is CIX going to spend the cash to explore new areas of potential growth? The eventual choice will lead to a revolving door for different sets of investors with different aspirations.

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

Stocks Discussed: CIX,
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