George Risk - a potential double hiding at NCAV

This write-up appeared in the latest issue of the Oddball Stocks Newsletter.  The newsletter is the premium version of this blog.  The newsletter is published six times a year and is loaded with oddball stock write-ups that are exclusive for subscribers.  Each issue highlights multiple oddball stocks, bank equities and includes a post by a guest writer.  Subscribers also have access to a subscriber-only forum where we discuss ideas related to the newsletter.

If you're interested in finding investments far off the beaten path where the market isn't efficient you need to subscribe to the Oddball Stocks Newsletter.  The cost is $590/yr.  Subscribe here.

George Risk Industries Inc. (RSKIA) – The recent turmoil in the markets has hit small cap stocks harder than the broader market and George Risk is no exception.  The company is located in Kimball, NE and manufactures a wide range of sensors and switches.

The company owns two small manufacturing plants located smack dab in the middle of Nebraska.  Both plants are relatively modest facilities in very small towns.

George Risk, the grandfather of the current CEO, Stephanie Risk, founded the company in 1965.  Prior to Stephanie taking control her father, Ken Risk, was CEO.  All three have managed to grow and expand the company.

I remember buying the stock around six years ago in the $4 range.  The memory is clear because I was working on building a position in the days right before and after our first son was born.  It took a number of days to build a full position, but it was possible.  Shares continued to rise with the company’s earnings and I sold out at over $7 a share in 2012.  It was a stereotypical oddball investment.  At the time of the initial investment the company was selling for less than their net cash and securities, was profitable and growing.  All I needed to do was buy and wait.

In the six years since I invested in the company I’ve loosely followed their quarterly reports and price.  The price reached a high of $9.04 in 2014 but since then has fallen to $6.55 as the company itself has continued to grow.  When I purchased shares in 2010 revenue was $7.8m a year.  In 2015 the company earned $11.9m, a growth rate of 8.8% a year.  This isn’t a high-flying growth stock, but 8.8% revenue growth is knocking the cover off the ball for a company that not only traded below its net current asset value (NCAV), but net cash and securities.  Their revenue growth has been great, but earnings growth has been even higher at 17.8% a year over the past six years.  Earnings per share have doubled from $.26 in 2010 to $.59 in the TTM.

And yet, with this sort of underlying growth the stock price has remained stagnant since 2012.  The company is once again trading right at NCAV, which is $32.44m, while their market cap $32.9m.  So what’s the problem?

The company’s problem is that they are successful in a small niche, but have almost no reinvestment opportunities.  The company has a 57% gross margin and a 20% net margin, enviable margins for any business.  Yet, there are few if any outlets for their excess cash.  They own simple facilities and their intellectual property walks out the door each evening.  The company dominates its niche, but is also stuck in that same niche.

In turn, the majority of their NCAV is stuck in cash and an equity portfolio.  Both cash and securities have continued to grow over time.  When I initially researched the company I thought the cash pile was a tax-efficient way for Ken Risk to grow a retirement portfolio.  He could build up a sizable kitty inside the company and then live off the dividends in his golden years.  If that was Ken Risk’s dream, however, it went unfulfilled as he died suddenly in 2013 and sadly didn’t get to see his golden years.  His daughter Stephanie, the former CFO, took over as CEO in his absence.

If you would have asked me in 2010 if I thought the event of Ken Risk’s passing would unlock value I would have said yes.  Unfortunately, it hasn’t.  The underlying company continues to operate as it has, but nothing else has changed, especially the share price.

Shareholders are right to be worried about the cash and investment portfolio.  It’s money the company controls, not shareholders.  A nice change is that the company paid out more than 100% of their net income as a dividend in the first six months of 2015.  During that time they earned $1.2m and paid out $1.7m in dividends.  If they continue this they will slowly liquidate and pay out their excess cash and securities holdings, but who knows if that will occur.

The eternal question is whether the company is worth more than their current price.  I can understand why the market is pricing the company the way it is.  While the operations are great they are small and stuck in a niche that they appear to be unable (or perhaps unwilling) to grow out of.  The company is also saddled with all that excess cash and the investment portfolio and the Risk family owns a majority stake in the company.

If management was serious about having the value of their business recognized by the market they’d pay out a dividend equal to 75% of their market cap.  Subsequent to such a dividend shares would be trading at approximately $1.50, and a company with 17% earnings growth and $.59 per share in earnings wouldn’t trade at $1.50 for long.  In such a scenario it wouldn’t surprise me to see shares rise to $7 or more, especially if earnings and revenue continue to grow.  The only thing stopping this scenario is entrenched management that seems content with business as usual.