Monday, October 26, 2009

Ridley Inc.

Ridley Inc. (RCL) manufactures and sells animal nutrition products to North American meat, milk and egg producers. As such, it operates in a fairly stable industry, as demand for many feed products tends to hold steady through recessions.

Despite the stability of this industry, and Ridley's role as one of the larger players with $600 million of annual sales, the company is conservatively capitalized with only $13 million of debt compared to equity of $150 million. Meanwhile, the company trades for just $100 million, while it has brought in combined operating cash flow of over $60 million over the last four years.

While the company may seem attractive at these levels, the stock is rather illiquid, meaning institutional investors cannot realistically participate in this opportunity. The company is not that small compared to some of the other stocks we've discussed on this site, but what keeps the stock volume low is the fact that more than 9 million of the company's 14 million shares outstanding are held by Fairfax Financial (FFH), one of the best value-oriented firms out there, as we've previously discussed.

Like Dorel, RCL appears to be utilizing the recession to make acquisitions. The acquisitions should add value for shareholders, considering the fact that a value firm like Fairfax is a majority owner. For example, RCL's latest acquisition should allow it to sell its existing products to new customers as well as sell the target's products to RCL's existing customers.

So while most investors apply valuation discounts for both 1) stock liquidity and 2) controlling shareholders, for value investors with long term outlooks this stock could represent ownership in a business at an attractive price where the principal shareholder's views on stock ownership are aligned with those of the individual investor.

Disclosure: Author has a long position in shares of RCL


Mike said...

I bought this two months ago and I agree with you analysis.

Christopher Pavese said...

Sounds like another good potential find. Thanks Saj. C

Pov said...

Hi Saj, quick question/observation. This company is trading at around BV, return on equity has been pretty pathetic over the last 5 years on average. Capex and D&A are roughly the same, so FCFE yield is probably similarly low. That on its own would suggest to me that this is not that great of an opportunity. What are your thoughts on this? Thanks.

Pov said...

Pulled the trigger a bit too quickly, sorry... RCL is trading around TBV and 0.7 of BV. But my fundamental question still holds, ie returns on equity have been poor (ca 6% over the last 5y) and you should expect ROE/0.7 at current market price, so about 9% return, which does not seem terribly attractive, given that it's a small company that has been losing money recently.

Saj Karsan said...

Hi Pov,

I don't like to get into specific valuation numbers as discussed here. But I will say that I think the possibility remains that the company can generate returns closer to what it did more than five years ago, especially with the new ownership group, which I particularly favour. While waiting for that to play out, the company is extremely safe from a capitalization point of view.

Unknown said...

Really love this company and agree with your analysis. It makes a lot more sense for me to own this company now.