Neenah Enterprises: What Happens When the Selling Is Done?

Neenah Enterprises (NENA.OB) is over 125 years old, yet they made their debut as a public company a little less than a year ago. You would think that one of the largest foundry companies in the United States would be due for a mind-boggling IPO on a major venue such as the NYSE or perhaps NASDAQ. However, when NENA began trading, it opted to be quoted on the Bulletin Board, which many just write off as a haven of, well, companies not worth investing in. Of course, there are many exceptional companies that list on the OTCBB, but that's a different story.

Perhaps NENA just wants to be public, but with that being said, they are not doing a good job of telling anyone they are. Yes, they file their quarterly reports. OTCBB companies are required to be SEC fully-reporting companies. However, a review of the NENA web site shows an investor relations section with no mention of a stock symbol, quote, or management profiles. This is a huge difference from the glorious investor relations sections of companies on the major exchanges. Compared to most OTCBB company web sites where they spend more time trying to sell their stock rather than the product itself, NENA's investor relations web site is non-existent.

Want more? Since 'going public,' which you would never know by reviewing their web site, the company has filed one 10-K annual report and two 10-Q quarterly reports. There has been no press release or announcement of the financial results. Even tight-lipped Seaboard Corporation (AMEX: SEB) is more transparent. NENA does make a conference call available, but the delivery sounds like a debate team reading a pre-scripted brief as fast as possible. Answers to questions are adequate, but often vague as the leaders of the call voice concerns that competitors are on the phone and listening. NENA, you are a fully-reporting, publicly traded company – the secret is out.

You would think NENA is suffering from an identity crisis, but behind the scenes like the Wizard of Oz is Tontine Capital Partners run by Jeffrey Gendell. Tontine acquired a 66% interest in the company and owns over 56% on a fully-diluted basis. Gendell does not sport a perfect track record, but he has illustrated immense patience and strong results, particularly in the steel arena. In late May, the stock was trading about $2 per share – down from over $6 when first quoted. The volume, though, surrounding NENA's stock activity was abysmal during the first few months of trading – about 1,500 shares each day during 1Q 2008. Then, the hammer came down. Gendell acquired another 485,000 shares at $2.07. The nature of the transaction was not disclosed, but it appeared to be an off-market deal.

In the following trading days, on relatively light volume, the stock soared to $3.75. The average volume was far greater than 1,500 per day, but in terms of dollar volume for a company with over $432M of book value, the trailing 3-month volume of 61,000 shares a day, or roughly $200,000, is not monumental. Of course, there are many conspiracy theorists arguing that the Tontine fund is just running up the price to make themselves look better. That could be true, but regardless, the volume continued and the price hit a road block.

Enter the Harbinger Capital Partners Master Fund I, owners of 1,474,000 shares per their Form 5 filed on May 28, 2008. In the 10 trading days since, Harbinger has dumped over 700,000 shares on the open market in the $3.50 area. It is clear that this group wants out. Private transactions? It appears to be open-market transactions. The daily volume on the days Harbinger has reported their sales seems to synch up. Again, not monumental dollar volume, but 700,000+ shares sold in 10 days for a stock that was seeing maybe 2,000 shares a day pass the tape just a few weeks ago – it is something to take notice. More importantly, for such a thinly traded stock and with a relatively small actual float, you would think this blatant selling of stock would just crush the stock price. NENA is a little off from its recent highs, but not by much – maybe 7% or so. This suggests that although Harbinger is throwing stock on the open market like there is no tomorrow, someone is there buying it.

It is unclear who it is. Gendell is not acquiring any additional shares as he has not reported any new acquisitions. One theory is that the employees and locals of Neenah, Wisconsin are picking up shares. A couple of Form 4s show some officers picking up about 3,300 shares. Granted, that pales in comparison to the 700,000, but remember not everyone is required to report transactions to the SEC – only the top officers. The reality is, we do not know – but buying is there.

It is now a race. Harbinger is now down to 669,000 shares and it may only take them another 10 trading days to dispose of them at this pace. Harbinger will likely not sell just for the sake of selling – they are smarter than just to pound the bid on the open market without support on the other side. If the buyers dry up before Harbinger runs out of inventory, then yes, the price may fall a tad lower, but Harbinger will likely stop selling and leave a temporary ceiling of $3.50/$3.60. The other scenario is that there is a perfect balance of shares on both sides and one Harbinger is done, the buying will be done. That will leave NENA's stock price to languish until they report some financial progress that excites the investment community. The third scenario is if the buyers continue to charge in, even after Harbinger is out of the picture. Just as the stock went from $2 to $3 in no time, you could easily wake up to see this one at $5-$10.

NENA's business, the true driver of a company's value, is not very exciting. The company makes things like manhole covers for cities and are the self-proclaimed one of only two companies in the country that can effectively supply cities. NENA also makes a bunch of other iron castings and products for various other industrial applications. In terms of margin and special products, there are really none to speak of. This is a foundry business to the end and acts like one. The company is laden with debt. In an environment that does not appear to be interest-rate friendly, this is not good, either. Finally, factor in high costs of raw materials and commodities, and well, NENA has a lot going against it.

However, if you like uncertainty, consider the following:

1. NENA successfully emerged from bankruptcy in 2003. We know that all steel companies are always one paycheck away from going under. NENA has never really been any different.

2. Starting July 1, 2008, the company will have its now molding process in place. They are banking heavily on this per their $54M investment. They are, however, on budget and on schedule. Per their conference call, they do not expect real material results to start impacting the financials until late 2008/early 2009, but could this be the item that turns NENA around?

3. Gendell is not always right, but he is no slouch either. Historically, he takes aggressive bets on beaten down companies and more often than not, is spot on. He owns 9M+ shares, which are now worth nearly $30M. He is not in this to make $5M-$10M.

4. Revenues and margins are spotty, but even with full dilution of warrants & options, NENA sports a book value of $27 per share. It is trading at about 0.15 book value. Certainly, debt laden foundries do not get the benefit of huge book value premiums, but this company is well capitalized and is not concerned about going under anytime soon. Yes, things are tight, but not to the point of insolvency.

Conceptually, things seem to be looking up for NENA. As for the stock price, it is already over 200% from its 1Q 2008 lows. Is there more upside? Well, the stars are aligning for such and if you want in, there are still 669,000 shares available in the $3.50 or so range. That I can promise you. Once those shares are gone, well, there may not be any more left there – but it does not mean anyone else will want to pay any more than that. There are most definitely buyers at $2.50 and $3.00 and even $3.50. Over $3.50 is a mystery.

But for a newly public company that is going about it in an eerily quiet way, appears to be turning things around with new technology, is not subject to any serious debt maturities for 5-7 years, is not in danger of going insolvent, and trading at 15% of book value – well, it might just be worth a look. For what it's worth, I'm looking and gave Harbinger a few of my hard earned greenbacks.

Disclosure: Long

Comments

[jomomma:]

Anyone considering investment in Neenah Foundry should consider the liability from their pollution. Gregg Industries in El Monte, California is wholly owned by Neenah.

They are embroiled in conflict with the community and the regulatory agencies, due to their gross and pervasive foul smelling dusts, gases and vapors that they emit by the ton.

And this decrepit WW II-era foundry is within a few hundred feet from a school and Headstart where the cancer rate was 5,085 per million. This is about 40 times the CDC national average for childhood cancer.

And, the plant manager, Dave Call, actually said at a public forum recently that the air coming out of Gregg is cleaner than the LA air that comes into the plant. Delusional denial?

They are so on the ropes they have even resorted to use the services of an AstroTurf enviromental group, who hijacked the name of a legitimate group and goes before the AQMD to lie for this company.

2008 Jun 19 11:00 AM

[Vinkman:]

Gendell has not put that much effort into the company to make manhole covers. If you track his efforts you will see he help create the wind compnay BWEN.OB. He helped engineer the merger of Brad Foote Gears with that company among others and I am sure more are to follow. Brad Foote Gears is run bby Bob Osterdorf and is also involved with Neenah. Recently their was a wind conference in Houston and he was there representing Neenah and Brad Foote. Do you think they are getting ready to manufacture castings for wind turbines and turbine structures instead of manholes thats why they have a new state of the art molding machine ? Could this be a wind play or a future merger ?

2008 Jun 20 09:12 AM