Palantir Posted September 12, 2012 Share Posted September 12, 2012 Core Investment Idea This is a simple case of a firm in a poor industry, but has a big investment portfolio that takes up most of the market cap (Think Sanborn Maps). It is not a great company, so I don't think the firm’s business model needs deep analysis, but due to its valuation I think it can be a great investment as more of an asset play if the putative catalyst appears. Business Overview George Risk Industries (Ticker: RSKIA) is a tiny manufacturer of burglar alarms based in Kimball, Nebraska. The firm also manufactures computer keyboards, pool alarms, thermostats, duct wire covers, and water sensors. The firm’s market capitalization is 34M, however being a very illiquid microcap that trades OTC, it rapidly fluctuates. The firm is headed by Mr. Ken Risk, who owns a substantial percentage of the shares outstanding. Essentially it can be thought of a private firm that is public for no real reason. Subsequently it is plain to see why the firm is undervalued; it is an obscure tiny firm, in a very “unsexy” industry that does not even trade on an exchange. Financial Statement Analysis The firm despite its size has been very stable in terms of generating cash flow. In the last four years, income has grown from 0.52M to 2.65M, however, Operating Cash Flow has been above 2M in that period, ranging from 2.06 to 2.45. The firm makes no acquisitions, and capital expenditures have been small, ranging from 0.06M to 0.30M. Effectively, FCFE has been above 2M over the past four years. The balance sheet shows 26 M in cash and investments. 20.2M of that is invested in a fixed income fund managed by a mysterious third party which GRI refuses to name, creating one potential risk factor for the firm. 5.8 M of it is held in cash and cash equivalents. So given a market capitalization of 34M, and portfolio of cash and investments of 26M, the business itself is selling for 8M. Keep in mind though, that even though the market cap is 34M, due to the high volatility, it can trade for far less than 34M as well, and moves of 5% on any given day are not uncommon. However, if we take the 34M figure, then essentially we can buy annual cash flow of 2M for only 8M. That is basically the value proposition of this particular investment. Catalyst This is a critical question as tiny microcaps can very easily stay in microcap purgatory if no catalyst appears and trade below liquidation for years on years. However I do believe there are two catalysts: buybacks and dividends. Over the past few years GRI has been buying back small amounts of stock, in addition it has started paying a dividend and increased it over the last few years. The current dividend yield on the stock is right now 3.38%, which is strong, but the catalyst to really unlock value is going to be increases on the dividend over the long term. Last year’s dividend was $0.23, and this year I am expecting an increased dividend of approximately $0.25, which would make it a slightly more than 50% payout rate on FCFE, which I believe is justified as it is not a growing firm. As a corollary to the above point, the position should be sold if these specific catalysts do not occur. One checkpoint is to see if the firm raises its dividend later this month, if the rise happens, then the investment case is being played out, if the rise does not happen, it is a sign of concern, if the dividend is cut, then it means there is a divergence of opinion between management and the investment view, as a result then it would be a candidate for selling. Risks The aforementioned fixed income portfolio is a risk as we do not know who is managing it or as to what their skill set is, so having that much of the firm’s value locked up in a fund is certainly a concern. The other risk is that being a private firm, entrenched management can use the firm as their own personal account, to some extent it is happening already as the firm leases a plane from Mr Risk. This much inside ownership also restricts the possibility of an acquisition. I estimate the IV to be approximately $10, compared to a last price of $6.80. Keep in mind this stock is very illiquid and movements of +/- 4-5% are common. So I would not recommend a position at this price, I think it can be had lower, at say $6 or lower. Limit orders are a must, you need to set the buy price below what it is trading at. Link to comment Share on other sites More sharing options...
Guest deepValue Posted September 12, 2012 Share Posted September 12, 2012 I'm not sure how you get to $10 if you think the business is crappy. The business has stable margins, a healthy ROE (calculated sans cash), and seems to have a small moat. This would be a terrible investment if the business were not creating value while we watch Ken sit on top of the pile of cash. One day that cash will be returned to shareholders, but until then the intrinsic value of the company had better grow or you'll end up with a meager return. Link to comment Share on other sites More sharing options...
Palantir Posted September 19, 2012 Author Share Posted September 19, 2012 Update, George Risk Industries declared a dividend of $0.28/share today. The big case behind my pitch was basically GRI distributing its cash pile to shareholders. I did not mention this in my pitch, but over the last three years, GRI annual dividends have been $0.17, $0.20, and $0.23. So this year, in order to continue confirmation of my investment thesis, I was expecting a dividend rise to a dividend of $0.25 or greater. As GRI passed this level, it's very good news in the context of the investment view I presented earlier. Link to comment Share on other sites More sharing options...
FrankArabia Posted September 19, 2012 Share Posted September 19, 2012 this company does have a huge cash/investment portfolio that you can value at around $30 million (book value). the company makes about $2 million a year. definitely not the best business you can find at current valuations (p/e ~15x). $10/share equates to $50 million market cap. I can't bridge your numbers unless you somehow assume the company liquidates and still produce $2-3 million annually. Link to comment Share on other sites More sharing options...
oddballstocks Posted September 19, 2012 Share Posted September 19, 2012 Have owned this one for years, longer than my oldest kid's been alive…sounds more impressive than it is, he's young.. I purchased for much less than cash and securities so it was a classic net-net, buy the cash get a business for free. The company is decent, they're growing at what I'd call a Midwest rate, slow and measured. They do have decent returns on capital, and if they kicked out all that cash I can see something in the $8-10 range. The idea here is you have $25m in investments and cash plus a business pumping out $2m a year. So a 10x multiple on the business and we're at $20m, plus the cash and securities $45m. A lot of people see the cash and think it'll never be returned. This is a very common approach for small family held companies, build up a retirement portfolio inside the company. Ken Risk will retire at some point (he's in his 60s) and he's going to need income, that'll come from the sustained or possibly increased dividend. If you're patient this thing drops $1 here and there. Not too long ago you could have picked up shares at $5.10 or so, I'd put in a few sucker bids and be patient. Link to comment Share on other sites More sharing options...
Palantir Posted September 19, 2012 Author Share Posted September 19, 2012 this company does have a huge cash/investment portfolio that you can value at around $30 million (book value). the company makes about $2 million a year. definitely not the best business you can find at current valuations (p/e ~15x). $10/share equates to $50 million market cap. I can't bridge your numbers unless you somehow assume the company liquidates and still produce $2-3 million annually. Yes, as oddball noted, I'm taking the 26M portfolio and putting a 12x multiple on FCFE, if you put a 10x multiple on OCF, you will reach same valuation. The business while not good, is not that bad either, they've been profitable for a while and reliable produce roughly 2M of FCFE year after year. Basically what it comes down to is, how much would you pay for an annuity stream of 2M every year? The real question over RSKIA is what they're going to do with the portfolio, constant and ideally rising dividends strongly support a return of capital view. Link to comment Share on other sites More sharing options...
Palantir Posted March 2, 2013 Author Share Posted March 2, 2013 Ken Risk passes away to cancer. http://www.panhandlepost.com/2013/02/28/kimball-leader-ken-risk-passes-at-age-64/ Link to comment Share on other sites More sharing options...
Palantir Posted September 18, 2013 Author Share Posted September 18, 2013 George Risk Industries, Inc. First Quarter Results http://www.marketwatch.com/story/george-risk-industries-inc-first-quarter-results-2013-09-18 They've raised their annual dividend to $0.30/share, in line with the basic thesis of increasing payouts every year, and they've seen some moderate growth in both revenue and profitability. Link to comment Share on other sites More sharing options...
oddballstocks Posted September 18, 2013 Share Posted September 18, 2013 George Risk Industries, Inc. First Quarter Results http://www.marketwatch.com/story/george-risk-industries-inc-first-quarter-results-2013-09-18 They've raised their annual dividend to $0.30/share, in line with the basic thesis of increasing payouts every year, and they've seen some moderate growth in both revenue and profitability. Thanks for posting this, I hadn't seen it. Interesting that they published PR for this. The only other PR from them was a few years back when they had a record quarter, it's worth considering why they published this. I'm happy about the dividend increase. Link to comment Share on other sites More sharing options...
Palantir Posted December 23, 2013 Author Share Posted December 23, 2013 RSKIA has had another runup to $8.93 as of today. I bought it at a higher price ($6) than many of the value bloggers who wrote up this stock. Demonstrates even if this stock had graduated out of net net status, its growth, strong free cash flow, low valuation and high dividend yield still would have made it a good investment. I still think there is some upside left, and can go higher than $10. Although I will consider selling at that point. George Risk Industries, Inc. Second Quarter Results http://www.marketwatch.com/story/george-risk-industries-inc-second-quarter-results-2013-12-19?reflink=MW_news_stmp Link to comment Share on other sites More sharing options...
yadayada Posted December 23, 2013 Share Posted December 23, 2013 ill put it on my watch list. Thanks. Any reason why they dont distribute the cash? Link to comment Share on other sites More sharing options...
learningfromgiants Posted February 9, 2015 Share Posted February 9, 2015 Any recent thoughts on RSKIA? Still has lots of cash and the business seems to moving along. They continue to bump up the dividend, but not buying back stock yet. Thx Link to comment Share on other sites More sharing options...
orthopa Posted March 14, 2015 Share Posted March 14, 2015 Looking at this too. Was looking at it a couple years back but blew it off. I like the div growth and return of cash to shareholders, I wish the main business was a little more "growthy" Link to comment Share on other sites More sharing options...
jawn619 Posted March 30, 2015 Share Posted March 30, 2015 ill put it on my watch list. Thanks.of Any reason why they dont distribute the cash? From the perspective of the controlling family, they would save in taxes by not paying out the cash through dividends. I think of it as they're using the company as a personal IRA/Bank account. That said, The business seems pretty impressive if they can generate almost 3 million per year in profit from a 10 million in true "equity". I do have a question that maybe someone more experienced could answer. When you buy a share of a stock in a company, you get a claim on their earnings through dividends but do you get a claim on their assets? I mean to ask from a legal standpoint, The market cap of this company is 40 million, and they have 30 million in cash and marketable securities, but as a minority shareholder, do we have any claim on that cash and securities? I think what adds to the complexity of this one is that big cash/marketable securities portion. if someone came to you and asked would you like to buy a company for 10 million that generates 3 million in profits i think it would be a no brainer. But If someone comes to you and says do you want to pay 40 million for 30 million in cash that you probably won't see for a long time and have no idea what type of marketable securities the company is going to put it in and a business that generates 3 milllion in cash per year it becomes a different question. Link to comment Share on other sites More sharing options...
oddballstocks Posted April 8, 2015 Share Posted April 8, 2015 Owned them when they were a net-net. They're a good little company that gave me a nice run. I purchased in April 2010 and sold in maybe 2013 (don't remember exactly). Here was the problem I had, and why I sold. They are indeed a good company, and they are spitting out a lot of cash. But are shareholders realizing anything? I sold this two years ago for about $.50 less a share than where it trades now. Shareholders have received a small dividend in the interim. The company needs to buy back shares or pay out a dividend. But I don't think that's ever going to happen. As someone mentioned above this is a tax-free retirement plan for the Risk family. Pile up investments and then dribble it out over time. I've found I do best with cash boxes like this, but with a caveat. I do best when they're absurdly undervalued and it's easy to ride the revaluation wave. Secondly you need to know when to get out if management makes no steps towards doing shareholder friendly things. If management is shareholder friendly then it can be ok to sit in the stock for a while. I'll probably be the fool here when this is sold for $25 to some Chinese company in a few years, so take what I say with a grain of salt..more like a shaker.. Link to comment Share on other sites More sharing options...
valuedontlie Posted April 8, 2015 Share Posted April 8, 2015 I tend to agree with Nate on this one. It would be preferable to purchase this type of name on a significant move downward as it happens with decent frequency due to the wide spread. On the flip side, it's interesting to note that the dividend has grown from $0.10/share in 2005 to $0.32/share today. That's over 11% per year (even though the past year saw only a 6.7% increase). If the yield on the stock remains the same or contracts slightly as time passes that would still provide a very good return albeit not stellar. Link to comment Share on other sites More sharing options...
valuedontlie Posted April 8, 2015 Share Posted April 8, 2015 Also, I do agree that the family treats the securities portfolio almost as if it were a 401(k) balance but the dividend provides them with a synthetic salary as well. In owning as much stock as they do, the dividend is likely very important to the family members for yearly income. Especially considering they do not pay egregious salaries. Link to comment Share on other sites More sharing options...
abitofvalue Posted April 9, 2015 Share Posted April 9, 2015 What I don't understand is who the heck shorts stocks like these - i mean it hardly trades and short interest is pretty minimal (like 250 shares currently) but still, who / why would you short this? For those that like this one - I think PDRX is another interesting opportunity. Business is better than RSKIA imo. Stock has run-up a fair bit last few months - probably the result of Nate & others discussing it - but it's still pretty cheap and has a good history of growth (Market Cap of $13M, $6M is cash, no debt, $3M EBITDA, EV/EBITDA 2.1x, P/E - 6.7x, ex-cash P/E - 3.5x) Link to comment Share on other sites More sharing options...
Jurgis Posted April 9, 2015 Share Posted April 9, 2015 I think that the main risk on this right now is their equities portfolio ($15M in January 2015). Since we don't know who manages their investments, we don't know what happens if stock market drops. I'd be fine if I knew that this is index fund, but now we don't know who it is and if they won't underperform hugely on market downturn. So it's no longer cash + business, but rather equities + cash & fixed income + business at a time when market valuation is not low. Of course, they might have Munger (or Nate? :)) ) managing their portfolio in which case it would be an advantage and not disadvantage. But we just don't know. I think the business might be doing a bit better since this thread began, but the portfolio is riskier. And the price is higher. Might be avoid for now... Link to comment Share on other sites More sharing options...
writser Posted April 9, 2015 Share Posted April 9, 2015 What I don't understand is who the heck shorts stocks like these - i mean it hardly trades and short interest is pretty minimal (like 250 shares currently) but still, who / why would you short this? Probably a market maker / broker. Just a random small leftover position. Link to comment Share on other sites More sharing options...
oddballstocks Posted April 9, 2015 Share Posted April 9, 2015 I think that the main risk on this right now is their equities portfolio ($15M in January 2015). Since we don't know who manages their investments, we don't know what happens if stock market drops. I'd be fine if I knew that this is index fund, but now we don't know who it is and if they won't underperform hugely on market downturn. So it's no longer cash + business, but rather equities + cash & fixed income + business at a time when market valuation is not low. Of course, they might have Munger (or Nate? :)) ) managing their portfolio in which case it would be an advantage and not disadvantage. But we just don't know. I think the business might be doing a bit better since this thread began, but the portfolio is riskier. And the price is higher. Might be avoid for now... Yes, even more concerning is at one point they talked about how they were a local "money manager" quotes included. I think they talk about it in one annual report. My sense is it's a Edward Jones local broker or something. I'm not sure how many expert money managers live in Kimball, NE (pop 2,400) Link to comment Share on other sites More sharing options...
Palantir Posted April 11, 2015 Author Share Posted April 11, 2015 Maybe some activist can shake this baby up a bit? Link to comment Share on other sites More sharing options...
augustabound Posted April 11, 2015 Share Posted April 11, 2015 Maybe some activist can shake this baby up a bit? How could an activist shake up a majority owned company? Link to comment Share on other sites More sharing options...
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