I wrote about Nacco Industries Inc. (NC) back on 2/6/09 and 3/13/09 when the stock was trading between the $20 and $40 range. Please note that during the time of the write up, the market went through a major breakdown. March 2009 marked the low in the equity market.
My original article on NC was about its valuation. The company was trading at a ridiculously low valuation based on the book value (asset less liability) of $50. The stock was trading at $37.75 or 25% below book value. The dividend yield was 6%. My concern then were the possibility of a dividend cut and large amount of debt. My thesis was also on inflation, which didn't really materialize.
On March 13, the company reported a loss of $51.69 per share. The headline might scare some people but a close look showed a clearer picture. Nacco was forced to take an impairment charge because of the stock market's condition. Here is a statement from the 4Q08 conference call
Because the company’s stock price at year-end was significantly below the company’s book value of tangible assets and its book value of equity, accounting rules effectively required that the company take a non-cash write-off of goodwill and certain other intangible assets totaling $436 million or 431.6 million net of taxes of $4.1 million.
Because at one point Nacco was trading at little more than a quarter of their book value ($14 / $50), accounting rules forced Nacco to write down their asset value. Operations were fine and this was just accounting "magic".
So where are we?
Nacco is currently trading around $60 with book value of $44.85 (1.38x book). Dividends for the last four quarters remained unchanged ($0.5175) and NC is currently yielding 3.4%. With negative earnings, they are paying their dividends ($4.3M/qtr) through existing cash of $178.80M. With large amounts of debt and low earning, we will have to see how Nacco navigates these hard times. I expect the dividend to remain unchanged or for the company to raise it by a small margin.
If you purchased this stock based on my writing, I would recommend you take profits now. The risk of dividend cuts remains. On the upside if you choose to hold this stock, a possibility of an asset write-up is there. Those non-cash write-downs in the fourth quarter could be a catalyst for the stock to pop back to $80 or $100. You have to decide for yourself if you are brave enough to hold.
The charts below show where Nacco was and where it is currently:
click to enlarge
In all of my writing, I urge readers to consider the technical pattern. In this case, I recommend buying if and when Nacco broke above $41. I didn't act on my own advice because my attention diverted to other companies. We will have to see where Nacco will go. For now, let's take the profit.