National Presto Industries Facing Headwinds

| About: National Presto (NPK)
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On July 29, National Presto Industries (NYSE:NPK) issued its second quarter earnings report. As the company has guided investors through its earlier reports, the second quarter was indeed challenging for the company. National Presto’s sales declined from $117 M in Q2 2010 to $98.3 M in Q2 2011. Its net earnings also declined to $10.82 M ($1.57/share) from $14.98 M ($2.18/share) in the comparable quarter last year. (Q2 2010 earnings were $14.12 M or $2.06/share if you adjust for a one-time income from a sale of obsolete equipment in the absorbent products segment.)

The company operates in three segments: Housewares, defense and absorbent products. Business in all the segments was affected.

  • Sales in housewares declined 24% with profit margins going down by 68.7% in the segment.
  • Sales in defense declined by 25.4% with profit margins down by 13.7% in the segment.
  • Sales in absorbent products rose by 30% but profit margins declined by 88.3%, mostly due to the absence of the one time income.

Multiple Challenges in 2011

Increased Commodity and Shipping Costs: This affects all three segments of the company but is of a greater concern in defense. National Presto has fixed price contracts with the Department of Defense and is therefore unable to pass on the cost increases to the customer except for some limited escalation clauses for steel, aluminum and zinc. If a high inflation environment materializes, as expected by many, we might see a further squeeze on National Presto’s profits.

Contract Expiration and Direct Competition: Medline is the largest customer in the absorbent products segment, making up more than 10% of National Presto’s sales in this segment. The Medline contract expires in September with no commitment to extend. Further, Medline is in the process of building its own absorbent product manufacturing capacity which could begin operation as early as Q4 . Medline has advised the company that it will continue purchasing products from National Presto even after its own facility comes on line. Still, this is a big question mark and the company has already started diversifying its customer base. On the positive side, National Presto is hitting up against capacity constraints in its production facility and is in the process of adding new capacity.

US Economic Situation: The defense segment might be affected if the US defense budget is reduced and external wars are ramped down. With the new debt deal reached in the Congress, this seems increasingly likely. Additionally, a large number of company’s housewares/small appliances are discretionary spending for retail consumers, and any further slowdown in the economy will have a negative effect on the company’s sales.

The absorbent segment will continue to ride the changing demographics of the United States and should see a growth as more and more people age and demand for adult diapers rise.

What Lies in the Future for National Presto?

It would be a rare stock that is not going to be affected by the economic situation and price inflation. With this in mind, it is worthwhile to look at the history of the company and how it has weathered challenges in the past. While this is a 100-year-old company, the defense and absorbent segments are relatively new, acquired within the last 10 years. The company is able to react to changing conditions and invest in new businesses as it finds necessary. It has a shareholder-friendly management that does not waste shareholder money on frivolities such as press releases or posting 8-K filings on its website, but has an unbroken 67-year history of paying handsome dividends to its shareholders. As long as the management stays and its shareholder commitment and transparency continues, the company will remain a good business to own.

NPK stock has reacted to the latest earnings report and at this time might be a good entry point for any investor who has the stock on his watch list.

Disclaimer: I own the stock in my portfolio and am not planning to buy or sell in the next 72 hours.