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Praveen Chawla
Praveen Chawla
Articles (65) 

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.

Dividend

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.

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Valuation

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.

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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.

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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.

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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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