Monday, August 8, 2011

National Presto a Ben Graham NCAV stock is cheap again

National Presto (NPK)

Price: $87.01 (8/8/2011)

This is an idea that I read about in Barrons, the company seemed my speed, industrial, conglomerate and cheap.  I apologize for the lack of depth in this post, I want to jot down a few thoughts on a few different stocks this week as I'm looking to deploy cash.  I'm not sure how long prices will remain depressed, and I know there will always net-nets laying around but better stocks tend to appear and then disappear quickly during panics.  If I can get a quality business on the cheap I'd much prefer that to a net-net.

National Presto is a diversified manufacturer located in Eau Claire WI.  The company has three divisions: Housewares/Small Appliances, Defense Products, and Absorbents.  Housewares and Small Appliances are things like pressure cookers, skillets, and coffee makers.  The Defense Products division manufactures ammunition which it sells to the DOD.  The Absorbents division manufactures private label adult diapers.

National Presto has some allure with value investors, the company was mentioned in the Intelligent Investor as a NCAV stock with great ratios.  National Presto again traded below NCAV back in 2001 following the dot-com bust.  It seems an investor could buy close to NCAV in 2009 but not below.  We're far off from that now, but I think the stock is still compelling.

Quick Investment Thesis
-EV/EBIT 5.12 TTM
-P/E ex-cash of 7.65
-$15.20 cash and securities per share
-No debt
-A declared $1/sh dividend, management has typically declared a special dividend paying out almost 100 % of earnings.  This past year they paid out $8.14 vs $8.99 in earnings per share, a 90% payout ratio.
-17% ROA, 20% ROE
-ROIC of 14%
-There is a $329m order backlog for the defense segment, this is orders that have been received where revenue can't be recognized yet.
-There are still two wars (along with Libya) and soldiers who need bullets.
-There is a longer term demographic trend of aging baby boomers of which a small percentage will need adult diapers.  As the proportion of the population grows in age this should be an expanding market.

Risks
-TTM cash conversion of 67%
-The most recent quarter saw a 25% decrease in defense sales although attributed to timing it's still concerning.
-National Presto is spending $30m to upgrade the absorbent machinery.  This segment has one customer which accounts for 12% of consolidated sales.  The customer is building out their own facility which can make similar products, they have told National Presto they expect to continue purchasing from them, but this is a concern.
-The product mix is eclectic and can be viewed as a diversifier, at the same time if the US is heading into a recession there could be reduced demand for small appliances as well as reduced defense spending.
-30% of revenue is derived from consumer spending, appliances aren't necessary purchases.
-Wal-Mart accounts for 11% of National Presto's sales.

Final Thoughts
-I like National Presto, they have been growing sales, cash flow and net income steadily for the last decade.
-The company seems cheap on a multiples basis, with a rough DDM I get $114 a share.
-I don't like that absorbents is capital intensive and only became profitable in 2009, there isn't a lot of great history there.  While things seem great now if there is a bump in the road I worry about this segment sucking up cash.
-If we continue to see a downdraft in oil prices that would boost the bottom line of absorbents.  Steel pricing and aluminum pricing affect the houseware and defense segments.
-NCAV is $39 a share, book value is right around $40 a share as well.

Disclosure: I am looking to build a position near this price or at a lower price.

6 comments:

  1. I found u on twitter--good stuff on NCAV--tommorow at 1pm est Bruce berkowitz VS Moynihan(BAC) Could it be, That BAC is a value? ......Naaaah.. couldn't be. Impossible

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  2. Graham actually discusses National Presto at length in The Intelligent Investor...

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  3. How are you calculating ROIC? I am getting 18.5% ROIC. Thanks -

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  4. Here's how I calculated ROIC

    I took FCF of 26 and divided it by
    Equity - Cash - Marketable Securities (299 - 25 - 88)

    26/186 = .139

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  5. Your blog is a great read. I'd love to get your opinion on some Japanese net-nets, such as Ryoyo Electro and Tsutsumi. I saw your post on DAIWA.

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  6. Christopher,

    I haven't taken a deep look at Ryoyo Electro or Tsutsumi yet but I'll add them to my list. For a while I was really digging into the Japanese net-nets and since I'm not a Japanese speaker I setup a few rules for myself. I demanded strong cash flows, a very large margin of safety (the $.50 on a dollar or more off) and a history of free cash flow.
    The amazing thing is with even all those rules a ton of companies passed and are selling cheap. From what I'm seeing Tsutsumi looks pretty good, strong cash flows, decent operating margin, lots of cash.
    Shoot me an email at oddballstocks@gmail.com if you get a chance. I have a list I'll send you.

    Nate

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