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Praveen Chawla
Praveen Chawla
Articles (76) 

Investment Note: Chicago Rivet & Machine

This debt-free, dividend-paying industrial part supplier can be considered a 'bond substitute'

April 24, 2020 | About:

A deep-value name that has recently appeared on the Walter Schloss screen on GuruFocus is Chicago Rivet & Machine Co. (CVR), a small manufacturer of industrial fasteners and related tools for high-volume production. The Schloss strategy is to buy cheap stocks with strong balance sheets trading at multiyear lows.

Chicago Rivet & Machine has been in business since 1920. It has a clean balance sheet and is debt-free. This is a good thing as it operates as a supplier to the highly cyclical auto parts industry. It has a market cap of only $20 million and has working capital of $16 million.


The company pays a dividend yield of 4.27%. It has paid a continuous dividend since at least 1990. However, the dividend is more or less flat.



Given that the company is highly cyclical, earnings and cash flow can vary widely from year to year. As a result, the median price-book ratio is a good way to assess if the stock is overvalued or undervalued. The chart below shows the stock is currently trading at a price-book ratio of 0.67, below the median of 0.95.


Discounted cash flow

As the earnings per share trendline has been flat since 1990, it suggests that Chicago Rivet & Machine is a no-growth company.


Assuming CVR has normalized earnings per share of $1.53 and zero growth going forward, as well as a discount rate of 3%, we get a discounted cash flow value of around $25 using the GuruFocus discounted cash flow calculator. I set a 3% discount rate because of the present low interest rate environment and the company's debt-free balance sheet.


Final thoughts

The stock is of interest as a "bond substitute" given its debt-free balance sheet. It is trading substantially below the tangible book value of $30.18. Chicago Rivet & Machine has a long history of paying dividends, however, it is essentially a "zero growth" company since its earnings have not been growing. The stock has a margin of safety of between 15% and 35%. I think its worth taking a small position since it is a safe play in these turbulent times.

Note: The author does not own stock at the time of writing.

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About the author:

Praveen Chawla
I am a full-time investor now, investing my own money. I spent most of my working life in the pharmaceutical industry.

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