Thursday, September 20, 2012

Why I Own McRae Industries

I recently opened a position in McRae Industries (MRINA). MCRINA is a microcap company based in North Carolina. They make work boots and military boots. Their market cap is $40M. I believe MRINA is a great value. I bought MRINA as a long term value investment. Having said this, I want to warn the reader that microcap stocks often have limited coverge in the media and can be subject to fraud and/or manipulation. We all should be extra vigilant when dabbling in microcaps. Furthermore, the information in this blog should never be the basis anyone's investments. The reader should do his own research and/or consult a professional for investment advice before buying MRINA.

I found MRINA while screening for low P/E and low book-value smallcap companies. What stuck out about MRINA immediately is their impressive balance sheet and earnings. Their net-net value is about $15.50 per share, and their share price is $16.40! Their P/E is 8 and they have zero long term debt.

MRINA was founded in 1959 and in the succeeding years they built up a solid balance sheet. Their dividend yield of 2% is small relative to earnings. They buy back some shares. But mostly they mostly retain their earnings as equity on their balance sheet. In this manner they have zero long term debt. This is the only company I know of that sells hard goods and have zero long term debt. What a concept!

So MRINA is a small company that operates without outside financial assistance. They make work boots for civilian and military use. Their military segment is 25% of their revenue. I believe they have been adversely affected by the recent downturn in construction. No doubt this segment of sales will improve once construction returns to normal. The management says that military contracts are very competitive and they could lose when when they bid in the future. But military is still a relative small portion of their business.

MRINA is a tiny company that has little (if any) financial coverage, so I have to really do all my own research. I researched to old SEC EDGAR filings. The EDGAR online system has been around since around 1994. So their filing would go back to that time. I found the annual report in for 1995. In the report, they refer to performance going back to 1991. So 1991 is the earliest information I could find on MRINA. Back in 1991, MRINA was not only a boots maker, but also a seller of copiers, and maker of bar code readers. The three segments were evenly split back then. Seems like they have dabbled in this and that over the years. They

Warren Buffett has always measured the Berkshire Hathaway's growth return to shareholder by the change in its book value. You can find this at the front of each of Buffett's letters to shareholders. I will also measure MRINA by its value, but instead of book value (which is equity) I will use net-net value, which is a more conservative (smaller) value than book value. Also, I include the dividends. See table below.

Most Recent Qtr 2011 2007 2005 2000 1995 1991
Net-net per share 15.40 13.80 11.509.705.904.503.70
Dividend per share 0.36 (projected) 0.36 0.330.300.360.350.32

This table shows that MRINA has grown in its net-net plus dividend value at more than 10% per year. And they have not really had to increase revenue, they have kept revenue always about the same. They simply manage the business well and thereby returning cash to the balance sheet or the shareholders. However, this current model cannot work indefinitely into the future because their balance sheet is ever growing while sales and their business stays the same size. To best serve the shareholders in the future, they must either allocate that capital to grow profits, or they must distribute the cash to shareholders. And I bought MRINA expecting them to take either action.

Investors in MRINA should know MRINA is more than 50% owned by the McRae family. McRae family members also run the company. This means to me that the interest of management is aligned with the shareholders.

McRae is traded over-the-counter (OTC). This means it is not traded on a central exchange. OTC prices can fluctuate greatly.

MRINA is classified as Pink with Limited Information. This means MRINA is not required to file with the SEC, and their financials are not at the level to be considered current by the OTC Markets Groups. MRINA's yearly and quarterly financials are found on their website. Their yearly financials are audited by Grant Thornton, one of the largest auditors in the country.

MRINA was traded on the AMEX exchange up to 2005 when it voluntarily delisted to save on costs.

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