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Value Ideas Contest: Rimage

May 23, 2011 | About:
Rimage (RIMG): Safe asset play, the stock that Ben Graham and Walter Schloss would definitely pick.

Normally with the long-term value conservative investor, technology is too sexy industry to consider. But if they look twice at Rimage, at this price, the bargain is just screaming at them. Let’s have a deeper look inside this micro cap technology company.

Rimage is a provider of workflow-integrated digital publishing systems, used by businesses to produce recordable CD, DVD and Blu-ray Discs™ with customized content and durable disc labeling.

Founded in 1987, the focus of the business has shifted several times to catch up with new trends in technology.

1987 1995 2000 2006
Founded and focus on digital storage production equipment Development and sale of its CD recordable (CD-R) DVD recordable (DVD-R) publishing systems Blu-ray capabilities were integrated into key products to address the storage capacity needs

Rimage is a technology-driven company, so one of the key success factors is innovations of new products and new technology in order to stay competitive. So far, qualitatively speaking, it has successfully caught several “waves” of technology trends from CD to DVD to Blu-ray technologies.

It has its own manufacturing operations, consisting of the assembly of products from components purchased from third parties. Components include DVD-R drives, Blu-ray recorders, printers, circuit boards, electric motors, precision sheet metal assemblies, computer components and other mechanical parts.

For distribution, it has distributors to resellers in Europe, the U.S. and Latin America; a distributor or OEM to end-user distribution channel in Asia Pacific, some areas in Europe and some U.S. market applications; and direct sales to select accounts using its own sales force.

The majority of revenue is generated through sale of Rimage-branded blank recordable CD, DVD and Blu-ray media, ribbons, ink cartridges, parts, repair services and maintenance contracts. These parts of revenue which are considered recurring comprise around 54-60% of the total revenue. This recurring revenue will prove to be strong, unless there are any further new changes in technology or the company cannot catch up with the new trend. But so far, historically, the company has shown the ability to do so.

Looking at the performance of the company over the last 10 years from 2001, every metrics looks decent. The company has 10 year of profitability, no year showing losses, all 10 years showing positive free cash flow, and working capital as well as book value keeps increasing overtime. Buffett has noted that over the long run, the changes in book value are rough metrics for the changes in the intrinsic value. Its per-share book value runs from $3.71 to $13.35 in 10 years, showing the compounded annual growth of 13.7% per year.

Looking at the income statement, in terms of percentage, the operating income averaged around 16% of total sales (varied from 13-20%), net margin stays around 12%, (varied from 9-12%), and it does not show a lot of variation for the operating expense (including SG&A, R&D).

Looking at the most current balance sheet (March 2011), it has total cash of $109 million consisting of cash and $9 million in short-term investments, virtually no long-term debt, with the market capitalization of $136.8 million (dated May 23, 2011). The enterprise value of the company only stays around $19 million. The contractual obligation (including operating lease), which is off-balance sheet, is total more than $1 million, so it’s considered to be small and the investors don’t need to worry about it.

Rimage doesn’t require significant capital investment, as all fabrication of its products is outsourced to vendors. And it has impressively shown the free cash flow is positive for at least 10 years from 2001. Trailing FCF for Rimage stays at around $14 million, so the FCF yield is at 73%.

There are always some risks involved. Of course, there is the biggest risk inherent in almost every technology company, that the industry changes very fast, and no long-term investor can be certain of who will enjoy the benefits. When DVD and Blu-ray is out of date, and if the company does not keep pace with the new trend in technology, the decent performance in the past would no longer exist. However, with the company full of cash and having a light amount of debt, it will be very flexible and adaptable to change, even its business model. Secondly, the small investor has to rely on the management’s and board's decision to enhance the value for shareholders via acquisition for more future growth or pay special dividends as the company gets a lot of cash on its balance sheet.

This stock at this price is definitely a safe asset play currently, and it will be good in a portfolio including other industries so that the investor can still get the diversification shield.

Disclosure: The author currently owns Rimage shares.

Anh HOANG (Tuc)

About the author:

Money manager in global equities, especially in U.S. and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam.

Visit Anh HOANG's Website

Rating: 3.5/5 (13 votes)


Tonyg34 - 6 years ago    Report SPAM
the company's business model is based on a razor and blades sales model. they sell you the everest printing system and then you re-up on discs, ink, service contracts. considering this is for the values ideas contest you didn't do a very concise job of explaining the business. only problem is even the porn industry doesn't mass produce dvd's anymore. RIMG is almost (terrifyingly) exactly like Standard Register Company (SR).

re: "The majority of revenue is generated through sale of Rimage-branded blank recordable CD, DVD and Blu-ray media, ribbons, ink cartridges, parts, repair services and maintenance contracts. These parts of revenue which are considered recurring comprise around 54-60% of the total revenue. This recurring revenue will prove to be strong, unless there are any further new changes in technology"

here's a new change in technology to consider. instead of buying storage discs why not save the file on a thumb drive or maybe on that new "cloud" computer i keep hearing about, or you could stream media files on the interwebs. this is a niche office supply store, not a technology company. mass production of dvd's? you know about that new technology product that's specifically designed for consuming media content, its called a tablet (iPad), and it doesn't have a disc drive. you didn't even try to address the challenges inherent in the business model, just advised me to trust the management. so the company will profitably go the way of SR and PBI, a superior supply and services business that less and less people use with the passing of every day.

Sdash - 6 years ago    Report SPAM
The Graham's intrinsic value formula as mentioned in the intelligent investor is available in www.investutils.com . You can change the variables and filter what tickers/sectors fit into your criteria. It is free of course.
Hoang Quoc Anh
Hoang Quoc Anh - 6 years ago    Report SPAM

Thanks for your comment. Of course, agree with you that for the technology business, it's always very vulnerable to change, and any great company can go down under if their business model is not adaptable to the new trend. And predicting what the company is going to do next, like what's the new drugs in the pipeline.. is very extremely difficult and nearly impossible.

The company has performed the decent record for the past 10 years, that gives us the confidence for going forward. Besides, the very strong balance sheet gives investor to sleep quite well at night when holding its shares. Each business has its price, no matter how great it is. And for Rimage, it's asset play, and the company is still earning money with positive cash flow.

In addition, any investor which buy in Rimage should bear in mind two things as I have mentioned: 1. it will be good in the portfolio including other stocks in other industries for diversification purpose, and 2. when the stock gets overvalued, it should be sold. And the investor should watch the company to see whether to continue to hold or got sold out.

@Sdash and Adib: is that advertising? Graham basic investing is generally based on net nets. and it's roughly can be calculated with simple maths. of course it needs wide diversification though.

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