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.
(Source: finviz.com)
Financial Analysis
| Chicago Rivet and Machine Co. (CVR) | |||||||
| 2009 | 2010 | 2011 | 2012 | 2013 | TTM | Industry Avg | |
| Profitability Ratio's | |||||||
| ROE (%) | -5.82 | 2.85 | 5.77 | 7.74 | 10.36 | 10.77 | 9.94 |
| ROA (%) | -5.23 | 2.56 | 5.17 | 6.88 | 9.17 | 9.24 | 6.81 |
| ROIC (%) | -5.82 | 2.85 | 5.77 | 7.74 | 10.36 | 10.36 | |
| Profit Margin (%) | -6 | 2.12 | 4.06 | 5.1 | 6.68 | 6.84 | 14.6 |
| Gross Margin (%) | 12.53 | 19.75 | 21.51 | 22.36 | 23.88 | 23.98 | 39.05 |
| Price to Earnings | 0 | 27.9 | 13.2 | 10.8 | 12.9 | 13.4 | 25.65 |
| Leverage and Liquidity Ratios | Latest Q | ||||||
| Assets to equity (x) | 1.14 | 1.14 | 1.14 | 1.13 | 1.12 | 1.17 | |
| 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) | na | na | na | na | na | ||
| Times Burden Covered | na | na | na | na | na | ||
| Current Ratio | 9.14 | 10.43 | 8.71 | 9.11 | 7.99 | 5.72 | 5.69 |
| Acid Test | 6.25 | 7.17 | 5.64 | 6.16 | 5.48 | 3.9 | 4.94 |
| Turnover Control Ratios | TTM | ||||||
| Asset turnover | 0.87 | 1.21 | 1.27 | 1.35 | 1.37 | 1.35 | 0.61 |
| Fixed Asset Turnover | 2.64 | 3.73 | 4.02 | 4.29 | 4.02 | 4.09 | |
| Inventory turnover | 4.25 | 5.68 | 5.1 | 5.24 | 5.76 | 5.53 | 3.55 |
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: Morningstar.com)
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.
http://online.wsj.com/articles/chryslers-u-s-sales-rise-9-2-in-june-1404216833?KEYWORDS=us+auto+industry
