Chicago Rivet is a tiny company on Inverness’s watchlist that operationally is a tough sell. If you like nice balance sheets, though, this one is for you. CVR headquarters are in Naperville, IL, and it employs just over 200 people. It was founded in 1920 to manufacture brake lining and harness rivets and IPO’d in 1930. CVR made a name for itself supplying aircraft wing fasteners in World War II, and today purports to be the industry’s most complete line of cold-formed parts, assembly equipment, and other tools and parts. Customers include automotive, cutlery, and electrical system manufacturers. Fasteners account for 90% of the business, and assembly components the other 10%.
Revenue hovered around $35mm from 2015-18, but some pre-COVID operational weaknesses have hampered the company. Revenue declined 12% from 2018 to 2019 to $32mm due to some trade headwinds and a tough auto industry. According to IBISWorld, the fastener industry is approximately $25bn in total revenue size, but it’s tough out there: rivets’ small size leads to commodity characteristics for the product, and large competitors do not help. CVR would likely be picking up the scraps from its behemoth competition like Fastenal Company (FAST, $5.3B 2019 revenue) and W.W. Grainger (GWW, $11.5B). Closer machinery and fastener comparables might be OmegaFlex (OFLX, $111mm of sales) or Bonal International (BONL, $1.6mm, and traded over the counter), though they do not make the exactly same products.
The below video covers the cold-forming manufacturing process for FAST, for similar products to CVR’s.
Operationally, CVR’s annual EBITDA of $3-5mm (~10% margin) has been under threat due to the aforementioned operating difficulties, and the company lost money in the first half of 2020. The company has a 37% revenue concentration among three customers to boot, meaning if one leaves, the business takes another major body blow. Chicago Rivet’s market cap[1] is down 50% from its 2018 peak of $44mm to $20mm in November 2020. Value investors might appreciate the low price, but we are very much looking at catching a falling knife. And so you might be wondering, what exactly is good about this company?
Chicago Rivet’s long operating experience, healthy balance sheet, and new management are two anchors and a catalyst for the stock. The gem for investors here is the company’s squeaky clean balance sheet, with cash of ~$7.4mm compared to total liabilities of $2.2mm (3.4x – very nice, despite being on a small scale). The company has invested nearly $18mm over the last 10 years to upgrade its capital equipment and facilities, preserving some balance sheet quality in a bankruptcy scenario.
Inverness calculates liquidation value of other current assets and net physical plant at $11.2mm, indicating a total net liquidation value of $15.6mm compared to its $19.7mm market cap, a good coverage of those assets to market value (79%). The company’s historic EBITDA of $2-3mm annually would lead to a private market EBITDA valuation multiple between 3x and 7x, for a valuation range between $6mm and $21mm.
Second, management was likely stagnant during the past few years: then-CEO John Morrissey, 84, was heading out the door, so Mr. Market could not have been optimistic about CVR’s prospects in a difficult trade environment and competitive end markets.
Mr Morrissey retired in May 2020 and was replaced by Michael Bourg, 58, who has been working for the company since the 90’s. The fresh management was well-received by the market, as the company has added about 10% to its market cap since Mr. Bourg’s promotion (this could also be from coronavirus recovery). After its weak first half of 2020, CVR had a profitable third quarter and looks to be on pace for about $25mm in 2020 revenue and breakeven EBITDA. The company did slash the dividend to its current $0.40/share annual level, but Inverness considers this a shrewd and necessary move to conserve cash and ensure long-term returns to shareholders.
And so the opinion at Inverness is that the health of CVR is being overlooked. The strong balance sheet and continual dividend payments are good value-adds to any portfolio of companies. With a management team both experienced in many types of operating environments and focused on preservation of value for shareholders, Inverness likes CVR into the next decade.
Inverness Holdings does not have an equity interest in any companies discussed herein.
Sources: IBISWorld, company and competitor 10-ks.
[1] And enterprise value, owing to its lack of debt
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