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Nancy Wong
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I started investing in mutual funds in 1993. Gradually, I have moved onto owning individual stocks, real estate, and individual bonds. For the last five years, my focus has been on building income streams. I worked in the high tech industry. I have an MBA as well as MS in Telecommunications. My... More
  • Has National Presto Industry (NPK) Bottomed Out? 0 comments
    Jan 19, 2014 10:25 PM | about stocks: NPK

    I recently created a new stock screen to search for cash rich companies with strong balance sheets, in hopes of identifying companies that are candidates for future special dividends. National Presto Industries (NPK) came up as one of the companies on my search.

    Stock Price

    NPK share price has gone down 40% since Jan 2011, from $131 down to $78. During the last 12 months, the share price has stabilized, resulting in a gain of 8% with the high at $81 and the low of $67.

    The earnings, EPS, has gone from $9.26 for 2010 to $5.64 in 2012. For ninemonths period ended Sept 30 2013, the EPS is at $3.50. For the entire year of 2013, the EPS is likely to come between $5.09 to $5.16, resulting in a 3-4% drop from 2012.

    Does the share price have upward momentum in 2014? Let's take a look at the business from the inside out.

    Business Analysis

    NPK has three business segments: Appliances, Defense, and Absorbent products.

    From company web site, "National Presto Industries, Inc. operates in three business segments. The Housewares / Small Appliance Segment designs and sells small household appliances and pressure cookers under the PRESTO® brand name, and is recognized as an innovator of new products. The Defense Segment manufactures a variety of products, including medium caliber training and tactical ammunition, energetic ordnance items, fuzes, cartridge cases, less than lethal munitions and less than lethal accessory equipment. The Absorbent Products Segment is primarily engaged in the manufacture of private label adult incontinence products."

    Looking at the 10-Q, All revenue segment decline from a year ago. The table below shows the percentages change in revenue for nine months period ended Sept 30 2013 from the nine month period ended Sept 30 2012:

     

    % Revenue Decrease

    Appliances

    -7%

    Defense

    -18%

    Absorbent

    -12%

    Total

    -14%

    Of all three segments, Defense decreased the most, followed by Absorbent and Appliances.

    How much weight does Defense carry in the overall business?

    The Table below shows the contribution of each business segment to revenue, gross profit and operating profit.

     

     

     

    Revenue

    Q3,2013

     

    Revenue: Nine Months ended 9/30/2013

    Gross Profit

    (after COGS)

     

    Operating Profit

    (after SG&A)

    Appliances

    29394

    29%

    78772

    28%

    15762

    29%

    7,474

    20%

    Defense

    52453

    52%

    149920

    53%

    36456

    67%

    29,153

    79%

    Absorbent

    18765

    19%

    56506

    20%

    2052

    4%

    406

    1%

     

    100612

    100%

    285198

    100%

    54,270

    100%

    37,033

    100%

    Slightly over half of the company revenue comes from Defense. Further, the Defense business segment brings in 67% gross profit and 79% of the operating profit. Defense is the bread and butter of NPK and it has also declined the most during the last 12 months.

    Upon analysis, the company's reliance on defense is a lot heavier than I originally thought. The picture looks grim even though the company has a current ratio of 5 and no debt.

    Looking forward, there is hope. Acquisitions may just be what NPK needs to revive itself.

    Acquisitions

    The following excerpt from the 10Q indicates that NPK has acquired a revenue stream for its Defense segment for the next 3 years.

    Excerpt from 10-Q, "On November 7, 2013, AMTEC Corporation, a wholly-owned subsidiary of the Company, purchased substantially all of the assets of DSE, Inc.

    ("DSE"), a defense contractor that manufactures and sells 40MM ammunitions to the U.S. Government. The purchase price was $47.1 million.

    The fair value of the assets acquired and liabilities assumed as of the date of acquisition will be recorded in the Company's consolidated financial statements. Because the valuation of the assets acquired and liabilities assumed had not been completed as of the date of the issuance of the Company's consolidated financial statements, it was not possible to reasonably estimate the nature and amount of any potential goodwill or the value of identifiable intangible assets.

    Recently, NPK has also purchased all the assets of Chemring Engergetic Devices, Inc, further boosting its defense segment.

    Excerpt from Dec 23, 2013 press release " Eau Claire, Wisconsin (December 23, 2013)-National Presto Industries, Inc. (NYSE: NPK) today announced that on December 19, 2013, AMTEC Corporation, its wholly owned subsidiary, entered into an agreement for the purchase of substantially all of the assets of Chemring Energetic Devices, Inc.'s business located at the facilities in Clear Lake, South Dakota and all of the real property owned by Technical Ordnance Realty, LLC. The closing of the agreement requires satisfaction of certain conditions. The Clear Lake facility is a manufacturer of detonators, booster pellets, release cartridges, lead azide and other military energetic devices and materials. It has annual sales of approximately $15,000,000. Major customers include US and foreign government agencies, AMTEC and other defense contractors.

    Depending on when NPK can integrate its acquisitions, revenue should start back on the uptrend.

    Bottomed out? Yes

    My analysis suggests that NPK is a BUY because of its projected growth for the next 12-36 months (i.e. the recent acquisitions are the key to NPK's turnaround in 2014). The stock price has bottomed out in its current range of $67-$81. It is a volatile stock. Phase in your investment, buy more at the bottom of the range.

    In terms of income, my assumption is that there will be little to no special dividend since the company will want to replenish its cash base after the acquisition; given the company's conservative financial practice in the past. The regular annual dividend of $1 should be safe.

    Risks

    Risk of my analysis include:

    • The time it takes to synthesize the acquisition
    • Margin impact (positive or negative) is unknown. The acquisitions may or may not increase the EPS.
    • Macro factors such as global sell-off, fed policies, etc.
    • Finance structure/impact to cash is unknown. The company may or may not have incurred debt in its recent acquisitions.

    Disclaimer

    The author holds initial position in National Presto Industries at the time of publication.

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