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National Presto Industries: 8% Yield on the Back of 69 Years of Consecutive Dividends
Posted by: Mark Lin (IP Logged)
Date: December 10, 2012 11:19AM
National Presto Industries Inc. (NPK) 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 widely recognized as an innovator of new products. The Defense segment manufactures in the U.S. a variety of products, including medium-caliber training and tactical ammunition, demolition devices, fuzes, cartridge cases, less-lethal munitions and less-lethal accessory equipment. The Absorbent Products segment is primarily engaged in the manufacture of private label and PRESTO branded adult incontinence products in the U.S.
NPK currently trades at a trailing 12 months P/E of 13.05 and a trailing 12 months EV/EBITDA of 5.64. Its current P/B valuations at 1.65x are at a 15% discount to its five-year average P/B of 1.95. NPK achieved a 12.6% ROE for the past 12 months and a five-year average ROE of 16.1%.
Financial and Business Risks
NPK is debt-free with net cash of $113.3 million representing 21% of its current market capitalization of $533.7 million. However, this does not include purchase obligations amounting to $184 million as at Dec. 31, 2012. Purchase obligations, in NPK's case, include outstanding purchase orders issued to its housewares manufacturers in the Orient, and to material suppliers in the Defense and Absorbent Products segments. NPK has the discretion to cancel or change many of these purchase orders but may incur costs if its supplier cannot use the material to manufacture customers’ products in other applications or return the material to their supplier.
In the Housewares/Small Appliance segment, NPK relies on handful of third-party suppliers in China to manufacture a majority of its housewares/small appliance products. NPK is exposed to unexpected changes in pricing or supply, as most products are procured on a purchase order basis. Walmart Stores Inc. (WMT), its largest customer in the segment, accounted for 11% of consolidated net sales in 2010 and 2009. NPK also needs to develop and fund technological innovations and anticipate consumer needs to be successful in the business.
As NPK’s sales in the Defense segment are primarily to the U.S. government and its prime contractors, it is expected to be negatively impacted by cuts in U.S. military expenditures. Also, almost all of NPK's U.S. government contracts are being performed on a fixed-price basis, where it bears the risk of any increases in budgeted costs or unexpected costs. This is particularly relevant in NPK's case, where products are accepted by test firing samples from a production lot, and lots typically constitute a sizable amount of product. The cost to rework or scrap the entire lot could be substantial, if a sample is not fired as required by the specifications.
The Absorbent Products segment is dependent on key customers, with its largest customer, Medline Industries Holdings LP, accounting for more than 10% of consolidated net sales in each of the last three fiscal years. In fourth quarter 2011, Medline began operating its own absorbent products facility and purchases for 2012 are expected to decline significantly as a result. In 2009, NPK implemented a program to diversify its customer base. Also, the Absorbent Products segment is a low-margin, capital-intensive business, requiring NPK to operate near full capacity to achieve high operating efficiencies and profitable financial results.
NPK invests a significant amount in working capital. For the Housewares/Small Appliance segment, NPK needs to build up inventories to support the higher sales that occur in the latter half of each year. The multiple stock keeping units inherent in the private label absorbent product business and the ability to meet U.S. Department of Defense demands also necessitates the carrying of large inventories in Absorbent Products segment and the Defense segment, respectively. Inventory days have spiked to 96 days in 2011 from an average of 70 days from 2006 through 2010.
Business Quality and Capital Allocation
NPK's Presto pressure cookers took the top two positions in the Amazon Best Sellers ranking in the pressure cookers category, and its pressure cookers also occupied six of the top ten positions, as of the time of writing. There is a certain branding power for Presto pressure cookers for its long history and quality.
NPK has a contract backlog of $342 million, equivalent to 80% of 2011 total revenue, for the Defense segment, as at Dec. 31, 2012. However, all of its U.S. government contracts can be terminated by the U.S. government for its convenience, which provides only for recovery of costs incurred and profit on the work completed prior to termination.
NPK has paid dividends in every single year since 1945 and currently sports a dividend yield of 8.3%. Dividends are volatile, paid out as a combination of a regular $1 dividend and a special dividend. On Dec. 7, 2012, NPK announced that its board of directors declared its 2013 dividend, consisting of the regular dividend of $1 per share, plus an extra of $5.50. This is the most recent dividend in an unbroken history of 69years.
The 8% dividend yield is attractive, but valuations are not. The anticipated cuts in military spending and discretionary spending may be a further drag on NPK's sales and profits.
The author does not have a position in any of the stocks mentioned.