Decker Manufacturing Profits In The Dark - DMFG

Decker Manufacturing is a Michigan-based manufacturer of industrial fasteners like nuts and pipe plugs. Decker's products are used in the automotive, construction and agricultural industries. The company has been in business for 85 years.

Decker Manufacturing is a true dark unlisted company. Decker does not file SEC reports or even provide quarterly or annual results on its own website. Investors in Decker must wait for the company's physical annual report to show up in the mail. (The company might be willing to send information in response to requests, but I did not attempt this.) My annual report arrived on Monday. In addition to being one of the most informative and well-organized reports I have ever seen, it revealed a banner year for Decker. Revenues and earnings hit new highs, and the balance sheet grew stronger than ever.

Revenues for 2012 rose to $34.17 million, up 9.6% from 2011. Earnings leaped to $2.28 million, up 56.1%. The company provides a five year income statement history in the annual report, which I have reproduced.

The financial crisis of 2008 and 2009 did a number on the company's sales and profits, but Decker has bounced back in a big way. From 2003 to 2012, Decker Manufacturing grew its top line at a very respectable 5.9%.

Decker Manufacturing's balance sheet is extremely strong and liquid. The company owns $10.5 million in cash and marketable securities, nearly half its market capitalization of $22.6 million. Total liabilities are $6.8 million and include notes payable of $4.2 million and a pension liability of $0.44 million. Ordinarily, pension plans at small manufacturing companies make me very nervous. However, Decker's pension plan is closed to new participants and the return assumption of 7% is much more reasonable than many plans. The net pension liability amounts to 4.0% of shareholders' equity and does not give me pause.

The company's marketable securities are worth just over $7 million, and are split roughly equally between fixed income mutual funds and equity mutual funds.

Decker Manufacturing uses its marketable securities as a a sort of "ballast" for rough economic conditions. Even in 2009, when sales declined 32.4% and profits plunged to zero, the company paid a $1.00 per share dividend, funded from its reserves. Dividends seem to be somewhat of an obsession for Decker. Since 2008, the company has paid dividends of $9.20 per share, worth about 25% of the current share price.

Decker earned a return on equity of 12.4% in 2012. Good, but not world-beating. However, Decker's equity base is inflated by its mutual funds and excess cash. The current ratio is 3.3, indicating more than sufficient liquidity. If Decker returned its entire $7 million investment in marketable securities to shareholders, the current ratio would drop to a still healthy 2.3 and shareholders' equity would fall to $12.4 million. On a backward-looking basis, return on equity would jump to a much more attractive 18.4%. Decker's excess capital is hiding a high-quality business. If Decker reduced its dividend payout to 50% of earnings, I am willing to bet it could find some worthwhile projects to invest in.

Decker Manufacturing's share price mid-point is $37, giving the company a trailing P/E of 9.9. Net of cash and securities, the P/E is much lower.

While it's no once-in-a-lifetime bargain, Decker looks attractively priced. At the current earnings yield of 10.1%, even modest annual growth could push annual returns well north of what broad market indexes can offer. The company's significant excess capital limits the risk of insolvency and provides some optionality, should the company ever decide to use it more productively. Decker Manufacturing's chief risks are its tiny size and strong ties to the American industrial sector, which will inevitably experience booms and busts.

I own one share of Decker Manufacturing.