George Risk Industries: Better Late Than Never

(Editor’s Note: I wrote this post several months ago before I began accumulating shares.  Apparently I’m not the only blogger who has been sniffing around RSKIA as Whopper Investments beat me to the punch with a very well done post on May 25th. Enjoy!)

I have to admit that I anchor on prices. Missed opportunities weigh on my mind and my analysis. I see what I could have paid for a stock 6, 12, or 18 months ago, and it clouds my “value” judgment. It must not be a good value if the stock is now up 50%, 100% or even 200%, right? This is a dangerous habit for long-term value creation, and one I try to keep in check, but what can I say – I’m cheap!

For this post, I’m suppressing that tendency and pressing forward with an analysis of George Risk Industries (RSKIA). Sure, you could have bought RSKIA for less than $4.00 in 2009 or less than $5.00 in 2010, but it’s still a good opportunity (in my humble opinion) at today’s $6.00 quote.

I’ll try to be brief in this post – for one reason RSKIA is a fairly simple business. For another, there’s been a fair amount of ink spilled on the subject of RSKIA by other, more talented value investors (not all of whom agree with my analysis):

January 21, 2010 piece at The Rational Walk
July 30, 201 piece at The Rational Walk
February 5, 2011 piece by Geoff Gannon (see the second half of the article)
August 2, 2011 piece at Oddball Stocks

RSKIA makes electronics products such as computer keyboards, push button switches, burglar alarm components and systems, pool alarms, thermostats, EZ Duct wire covers, and water sensors. Security products comprise the overwhelming majority of sales (~88%). Although George Risk has over 4,000 customers, 1 distributor (a subsidiary of Honeywell) accounts for nearly 42% of total sales. To get a feel for just what it is RSKIA manufactures, check out the company’s website – they build some cool gadgets (www.grisk.com).

A couple of quick tidbits about George Risk industries. Management typically pays 1 dividend per year (last year ex-date of 9/28/11), which at $0.23/share comes to a yield of 3.8%. Management is also actively searching for “lost” shareholders of the stock to repurchase shares. I think this indicates how closely held and how long some of these shares have been sitting out there – George Risk management is actually out there calling people who forgot they own those stock certificates locked up in their safe deposit boxes. Through this and other efforts, management has repurchased 10,855 shares in the last 12 months (~0.2% of outstanding – not exactly burning up the certificates, but not bad considering avg. daily volume is somewhere around 300 shares).

Although the dividend and the buybacks are interesting, the crux of RSKIA is in its profitability and cash balances. As of most recent quarter end (1/31/12, 3Q12) the company had cash and marketable securities of $4.94 per share. This puts a value on the operating business of just $1.06/share ($6.00 market price less $4.94 in cash – we can quibble over how much cash the company needs to operate, but I’m assuming $0 for this analysis).

Last year, RSKIA had EPS of $0.40. However, much of that came from earnings on investments (the interest, gains, and dividend income on the cash and marketable securities). If we net out this non-core income, the firm generated EBIT of $1,7650,000. At an assumed tax rate of 35%, this equates to EPS of $0.23. At an operating business value of $1.06, this equates to a P/E ratio of 4.6x. An earnings yield of 21.7% (inverted P/E = E/P = earnings yield) is nothing to scoff at.

Over the last 3 years - which include the worst downturn in the U.S. housing market since the Great Depression, a rough time for a company that makes electronic and security products targeted at residential real estate – George Risk Industries has had an average, adjusted core ROE of 16.1% (netting out the investment income and assuming a 35% tax rate). At quarter end 1/31/12, netting out cash, RSKIA had a book value of $0.80 per share. A 16.1% ROE equates to “normalized” EPS of $0.13/share. I say “normalized,” but I may go so far as to say “depressed” given the housing environment of the last 3 years. At $1.06 in residual value, RSKIA is priced at 8.2x earnings, or an earnings yield of 12.2%.

I could spend lots of time laying out the case for RSKIA, but it would all be repetitive of what I’ve just shown – net of cash/securities, RSKIA looks remarkably cheap.

This isn’t to say there aren’t risks - Ken Risk in fact (I know . . . a pun on the name risk . . . but come on, it was right there, I had to throw it in). Mr. Risk is the CEO, the son of the company’s founder, and the owner of slightly more than 58% of outstanding shares. He and his management team have shown little interest in returning the nearly $25 million in cash and securities to us as shareholders. Many analysts will cite this as a lack of catalyst – or even a weakness of the company. Management could squander this asset, do a silly acquisition, or invest poorly. All of that’s true, but do we really think the Risk family is going to intentionally squander an asset they’ve been building since 1967? At the end of the day, I find myself asking “so what” if they don’t immediately monetize the cash and investments?

With a stable operating company generating consistent ROE, I’m happy to go along for the ride and be a claimholder for whenever and however management decides to monetize the on-balance sheet cash/securities. If, in the meantime, you can find me $4.94 in cash with an operating business attached that generates an average ROE of 16% (through a generational market downturn) and that sells for less than $6.00/share, let’s talk. No seriously, let’s talk. I mean it; operators are standing by, because just like George Risk Industries, that is a business worth looking at.

Full Disclosure: Long George Risk Industries (RSKIA). If, after conducting your own due diligence, you decide to buy shares of RSKIA, watch the bid/ask spread - share volume is sporadic and very low. Proceed at your own caution!

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