Friday, July 18, 2014

Chicago Rivet and Machine Co. (CVR)

About the Company

Chicago Rivet and Machine Co. (CVR) operates in two segments of the fastener industry: fasteners and assembly equipment. The fastener segment manufactures and sells rivets, cold-formed fasteners and parts. The assembly equipment segment is mainly for the manufacture of automatic rivet setting machines. The main market for CVR’s products is the North American automotive industry.


Financial Analysis
Chicago Rivet and Machine Co. (CVR)
20092010201120122013TTMIndustry Avg
Profitability Ratio's
ROE (%)-5.822.855.777.7410.3610.779.94
ROA (%)-5.232.565.176.889.179.246.81
ROIC (%)-5.822.855.777.7410.3610.36
Profit Margin (%)-
Gross Margin (%)12.5319.7521.5122.3623.8823.9839.05
Price to Earnings027.913.210.812.913.425.65
Leverage and Liquidity RatiosLatest Q
Assets to equity (x)
Debt to Assets (%)8.30%8.30%12.00%11.54%10.71%14.82%
Debt to Equity (%)9.52%9.52%13.64%13.04%12.00%17.40%200.60%
Times Interest earned (x)nanananana
Times Burden Coverednanananana
Current Ratio9.1410.438.719.117.995.725.69
Acid Test6.257.175.646.165.483.94.94
Turnover Control RatiosTTM
Asset turnover0.871.211.271.351.371.350.61
Fixed Asset Turnover2.643.734.
Inventory turnover4.255.685.15.245.765.533.55

CVR’s ROE has been steadily increasing over the past 5 years and is currently above the industry average. A reason for the increasing ROE has been an increasing profit margin and increasing ROA over the past 5 years. The profit margin is still far below the industry average this is due to a higher cost of goods sold which is reflected in the gross margin. Despite being below industry averages CVR is improving margins and a higher return on assets gives it a slightly higher ROE than the industry average.

Another determinant of financial strength can be seen in CVR’s turnover control ratios. Asset turnover (sales generated by each dollar of assets) has increased by 0.48 over 5 years, so they are earning 48 cents more on each dollar of assets than they were 5 years ago, this is also much greater than the industry average of 0.61. An increasing asset turnover is also a factor in an increasing ROE.

While looking into CVR’s leverage into liquidity ratios it can be seen that assets to equity has decreased over the past 5 years following the same trend as the current ratio and the acid test (quick ratio). This is due to an increase in accounts payable over the past five years, while debt to assets and debt to equity levels are rising and the firm is becoming more leveraged this is not a cause for concern because this is not due to increased debt financing. Another cause for the decreasing current and quick ratio is a decreasing cash account; this is due to a large increase in investments in plant property and equipment, largely due to investing in new cold heading and screw machine equipment. Since CVR has become much more profitable after the end of the recession they have been making large investments into expanding their operations, which have provided additional capacity and production capabilities which could in turn increase future revenues.

CVR is in a very strong financial position and has been taking advantage of its lack of debt obligations and high cash reserves by increasing investments in equipment to provide future increases in revenues.

(Data from:


Growth Outlook

CVR’s growth depends on the strength of the domestic automotive industry which is forecasted to improve to its highest level since 2007. CVR’s management discusses the fact that pent-up demand, low interest rates, and an improving housing market are all factors that support this view. However due to recent news by the Federal Reserve which could increase interest rates as early as October would have a negative impact on the auto market and by extension CVR. Despite the future increases in interest rates a brighter economic outlook and low historical interest rates have continued to push up auto sales which rose 1.2% in June and achieving its highest selling rate since July 2006. Continued increases in sales of autos will have a beneficial impact on CVR’s revenues, however the long term sustainability of the domestic auto market is in question if interest rates increase in tandem with a decreasing unemployment rate.

Investment Return

For a very rough analysis of investment return I performed both a single factor and two-factor CAPM analysis. For the single factor I used the historical S&P 500 return of 11%, I used the risk free rate as the current rate on 10-year treasury notes (2.58%) and CVR’s beta in relation to the S&P 500 (0.49). Running this through the single factor CAPM analysis I got an expected return of 6.71%

The two factor CAPM was more complicated and is subject to much more debate as the techniques used reflect the global auto industry not the domestic auto industry. The domestic auto industry is the one that affects CVR directly because they sell to domestic manufacturer. The first half of the equation is identical to the single factor CAPM analysis, the second half involved getting CVR’s beta in relation to the auto industry by use of the historical adjusted closing prices of CARZ ETF (Note: CARZ is a global auto ETF, which is one reason why this expected return is not accurate, I performed the analysis mainly for practice).  From this calculation I got an expected return of 8.27%. Again this two-factor model was used in relation to the global auto industry which differs from the domestic auto industry and both CAPM models provided are used only to provide a very rough idea of investment return.


CVR has had a very successful past 5 years, however there progress has been quoted to follow the auto industry which will be heading into uncertain times as soon as interest rates start to climb. CVR could see reduced demand for their product which would lead to decreased revenues. This company is definitely one for the watch list and if the auto industry does start to decrease with increased interest rates then the price could fall for CVR giving way to a great buying opportunity. Due to recent statements by Federal Reserve Chairwoman Janet Yellen increased interest rates might start off slow and later than expected due to her concerns about the strength of the economy, if this is the case then CVR could provide good investment value as the domestic automotive industry continues to strengthen.

Tuesday, July 1, 2014


AGCO Corp manufactures and distributes agricultural equipment and related replacement parts. Its product mix includes tractors, combines, hay tools, grain storage, etc…  AGCO’s products are under the Challenger, Fendt, Massey Ferguson, Valtra and GSI brands. Their products are distributed in more than 140 countries.
AGCO has maintained a five year revenue growth rate of 12.90% while also having a five year EBITDA growth of 31.60%. This large EBITDA growth was achieved by an improving gross margin over the past five years increasing from 19.18% in 2009 to 22.14% TTM. However this margin is lacking to competitor Deere & Co. (DE) which operates with a 31.90% TTM gross margin.  AGCO has had a huge increase in net earnings over the past 5 years increasing from $135.7 million in 2009 to $578.8 million TTM.

While looking at their balance sheet they are currently holding $193.9 million in cash and have been increasing inventories that have been following their increased net earnings. They have been borrowing more over the past five years; in 2009 they had $454 million in LT debt while they were measured at having $1.0143 billion in the latest quarter (Q1 2014). However this amount of debt can be covered with the 4.397 billion in current assets giving AGCO a current ratio of 1.60. This is not at the preferred ratio of current assets/ liabilities (2:1) and is weaker than the industry average (1.95).  AGCO has been retaining earnings and has seen a 5 year growth rate of 23.45% and has also been growing the total equity of the company (5 year growth rate of 13.8%).  AGCO has a relatively strong balance sheet however they are lacking in their current ratio however this is not much of a problem for the company because they are not highly leveraged (debt/equity ratio of 0.33) as large competitor Deere & Co. (debt/equity of 3.40).
AGCO trades at a P/E of 9.59 compared to the industry which trades at an average P/E of 16.08. They are closer to their 5 year P/E low (7.23) than their P/E high (22.43).


2014 will be a difficult year for AGCO, agricultural commodity prices have declines for much of the past year which translates into lower profits for companies like AGCO. Also according to a pole of farmers around 40% of the respondents reported they would purchase no farm machinery in 2014 ( Farmers are less eager to purchase machinery this year with changes to the tax law section 170 which allows for an immediate income write-off for any business asset purchase (new or used) made during that calendar year. The write-off was at an all-time high of $500,000 in 2013, but now it is set at only $25,000 for 2014 ( This will be a factor in farmers not buying new machinery in 2014 which will affect AGCO’s revenue stream.

In the company earnings report the management acknowledged that they were and will be facing challenging markets in 2014. They have said that they will be focusing on margin improvement by efforts on increasing productivity and reducing material costs throughout operations to offset market headwinds. Weaker demand in Brazil hurt their South America margins, sales were negatively impacted by dry weather conditions and also weaker demand from sugar producers. AGCO’s management is expecting production volume to be down 10-15% in the second quarter on a year-over-year basis. For the full year they are planning a decrease of approximately 5% compared to 2013. Target 2014 earnings are approx. $6 per share (down from $6.14 EPS in 2013)

Despite market headwinds AGCO has been returning value to company shareholders by significantly expanding their share repurchase program to $500 million. The lower share count has positively affected EPS by approx. $0.03.

There are very low expectations on AGCO in 2014 and that could be mean it could fall to very appealing levels especially if they are successful in increasing margins. I would wait on AGCO and see if they are successful on increasing their margins while facing market headwinds, if so they would be an attractive long-term buy.