I have been looking for some time for an attractive way to invest in the rebounding North American Automotive market, searching specifically for companies without the European exposure and headwinds faced by so many of the large automotive manufacturers such as Ford Motor Company (F). In so doing, I stumbled upon an interesting, tiny little company called Chicago Rivet & Machine (CVR). I say interesting for a variety of reasons, as it appears to offer value for the retail investor in particular, but does not come without its risks.
Before I go into further detail, let us very briefly gain an understanding of the business operations of Chicago Rivet & Machine. The company operates in two segments: 1) Fasteners and 2) Assembly Equipment. The following are descriptions from the 2011 Annual Report (10-K) filing:
1) "The fastener segment consists of the manufacture and sale of rivets, cold-formed fasteners and parts and screw machine products." - Typically around 90% of company revenues come from this segment.
2) "The assembly equipment segment consists primarily of the manufacture of automatic rivet setting machines, automatic assembly equipment and parts and tools for such machines."
The overwhelming majority of the company's sales are to customers involved in some shape or form in the manufacture of automobiles or automotive components, and with no overseas revenues, it is easy to see how dependent this company is on North American automotive industry for the better or worse. This piqued my interest, as it presents a potential play on rising U.S. auto sales over recent years' numbers, and has a lack of exposure to any European headwinds.
Well, let me cut to the chase. When I said earlier that this is a tiny company, I meant it. The company has a current market cap of only $19.83 million. However, it trades at a 14% discount to its net tangible assets, which are very near $23.1 million. This is a significant discount to the apparent liquidation value of the company. Furthermore, $7.4 million of these net tangible assets are cash or equivalents. These cash assets alone represent around 37% of the company's current market capitalization.
The current Price to Earnings ratio on trailing 12 months earnings is a tick over 12, making it reasonably priced, especially in context of the recently strengthening earnings growth attributable directly to improved auto industry in the United States. In brief, revenues through the first 9 months of 2012 have grown 10.1% compared to the same period of 2011; however, earnings per share have grown a much more attractive 36.8% over the same span, rising from $1.06 /share for the first 9 months of 2011 to $1.45 for the first 9 months of 2012 (showing growth in earnings at this rate despite booking special extra earnings in 2011 due to a property sale, which should have made for tough comparisons). This information may be found in the most recent quarterly filing.
Having established a reasonably attractive valuation, let me make a case for this company as a potentially attractive dividend income play for the retail dividend income investor. At a current share price of $20.53, the $0.60 annual dividend payout yields 2.92%, respectable yet not breathtaking, and likely not enough for many dividend investors to make a purchase. However, with the inclusion of a $0.30 special dividend last year, the yield actually approached 4.4% for 2012 at current share prices.
Upon analyzing the dividend history of this company, we see a more interesting tale of similar special dividends. The company has a fairly well established history of returning extra cash (in other words cash not needed to fund the foreseeable operations of the company) to investors in the form of special dividends. The following chart summarizes the most recent special dividends paid out by CVR management:
|Year||Special Dividend Amount|
This is a trend that I expect to continue as they have recently been demonstrating stronger and stronger earnings and have cash well in excess of capital expenditures of a typical year. For the purposes of hazarding an estimate of future dividend increases (either outright or in similar special distributions as those above, and with emphasis on the words estimate and hazard), let us average the special payouts over the 13 years since 2000. This brings us to an average of $0.12/year in special dividends returned to investors. Now if this were, on average per year, added to the current dividend, the yield at current share prices rises to a much more respectable 3.5%. I also feel this is a conservative estimate in light of the currently low payout ratio (which is only 36% of current past 12 month earnings), lack of debt, and improving earnings with little additional capital expenditures in recent quarters.
This thesis is not without its risks, and substantial risks exist in my mind. First of all, the small size of this company, and the commodity nature of the products from which it derives the majority of its revenues make it vulnerable to better capitalized competitors with more scalability and opportunity for efficiencies to lower the prices they can offer. And substantial competition does exist.
Furthermore, the company derived a total of 33% of its revenues from just two customers in 2011, with similar numbers in 2010 before that. If either or both of these companies were to seek their products elsewhere, the 14% discount to book value will be of little comfort to investors. This is a fairly large red flag for a company of this small size.
Additionally, prices for CVR's raw materials (namely steel) have been rising lately. They have thus far been able to offset these input costs with higher sales volumes in the presence of an accelerating automotive market. However, if sales volumes were to begin to decline in another auto market downturn, or due to loss of business, this small company may have a hard time offsetting these higher expenses and may fail to compete on a price basis with many competitors.
And finally, it is important to note the lack of liquidity in the common stock of CVR. Per the 2011 10-K, average daily trading volume for the year was below 3,000 shares with zero traded on some days. This could lead to substantial volatility of share price as well as difficulty finding a buyer for your shares at times.
Despite these risks, I would point out that the company has a record of 78 years with uninterrupted consecutive quarterly dividends, with interspersed special distributions of excess cash as noted above.
While not a thesis free of risk, I believe the company, despite its small size, offers a potentially attractive dividend income investment for retail investors in light of a currently strong or strengthening U.S. auto market (and subsequently earnings), substantial discount to tangible assets, and documented history of returning excess cash to investors in the form of special dividends.
However, given the risks to the investor noted above, I hope each individual will perform his own thorough homework on the company before making an investment decision. This article was intended to shine some light on an attractively valued company (that probably falls below most radars) that may continue to benefit from up trending auto sales in the U.S. while steadily returning cash to investors. I believe that this company, small in size but long in tenure, could be found an attractive investment near current prices.