Let’s start this article with a one-question quiz. GuruFocus and its investment community impress me every day with their investment acumen, so I have confidence in your abilities. Good luck!
Question: Which of the following companies had the highest average annual total return (geometric) from January 1988 to January 2012?
C. National Presto Industries
D. Exxon Mobil
Let me give you some hints:
Hint #1: Warren Buffett has (either currently or in the past) owned the stock of this company. He even called the then-CEO one of his “home-run hitters.”
Not yet sure?
Hint #2: This company was made mention of in Benjamin Graham’s "The Intelligent Investor" and was an example in multiple chapters.
You probably know it now, but let me give you one final hint:
Hint #3: In the last three months, this stock’s price has declined 30%, most likely because of the fairly recent ex-dividend date and the withdrawal of U.S. troops from Iraq and Afghanistan.
The answer? You guessed it: National Presto Industries!
(To you curious readers, here were the average annual total return figures from the question:)
National Presto Industries- 14.62%
Exxon Mobil- 12.54%
The above numbers were taken from Yahoo Finance’s historical stock price database and assume no taxes paid on dividends. The reason that Presto is still a small company ($500 million market cap) is because it pays out the vast majority of earnings in dividends.)
The recent fall in price has, I believe, caused the stock price to fall further than it deserves, which prompted me to research the company further.
National Presto Industries is a fascinating company that operates in three segments: Housewares (canners, pressure cookers, griddles, popcorn poppers, etc.), Absorbent Products (primarily adult incontinence diapers), and Defense (ammunition for the US Army, igniters, fuses, tear gas, etc.) These segments are obviously extremely different, but there are two things that each has in common:
They all are a) in highly competitive fields, and b) are considered necessary to society. Elderly folks will always need adult incontinence products. The army will always need ammunition. And, kitchens will always need kitchen appliances.
Even though all three of these products are fairly simple and easy to understand, each business is fundamentally different, and different risks are also involved in each of the segments. Let’s look at each segment individually.
Housewares/Small Appliances Segment Details:
|Segment EPS (my estimate)||$ 1.58||$ 2.61||$ 3.05||$ 2.14||$ 2.10||$ 2.56||$ 2.57||$ 1.56||$ 1.99||$ 0.61|
In an industry like “housewares” or “kitchen appliances,” the temptation for analysts is to jumble all of the different products together into one homogenous mass. That takes less work. However, in an industry like kitchen appliances, it’s important to learn what a company actually produces and what it doesn’t. Websites that list competitors to NPK are often amazingly off-base. Not all kitchen appliance makers are the same.
From its 10-k, National Presto states that it makes “pressure cookers and canners; the Presto Control Master® heat control single thermostatic control line of skillets in several sizes, griddles, woks and multi-purpose cookers; deep fryers of various sizes; waffle makers; pizza ovens; slicer/shredders; electric heaters; corn poppers (hot air and microwave); rice cookers; microwave bacon cookers; coffeemakers and coffeemaker accessories; electric tea kettles; electric knife sharpeners; shoe polishers; and timers.”
I’ll admit that when I first read that paragraph it didn’t really get me excited. However, when I began the work of researching each of the individual items that NPK’s housewares segment produces, I was impressed by their showing.
I was not sure, and am still not, how to get precise market share data for griddles, pressure cookers, etc., but one way to get a rough idea is to check the best-seller lists on amazon.com and reviews on amazon and walmart.com. I know that’s not academic research, but it’s a practical way to see what’s popular, selling well, and well-liked. Happy customers are a good sign, too.
Before visiting amazon.com and wal-mart.com, I was expecting to see some things from Presto for sale, but I was not planning on seeing that they are the strong player in the categories they produce goods in. In all of their primary products, they were highly ranked on multiple websites. Let’s look at a few:
Pressure Cookers and Canners, the first product listed on their 10-K:
On amazon.com, Presto held best-seller spots No. 1 and No. 2. In addition, they also had No. 5, No. 6, No. 7, No. 8, and No. 10. They sell well, but the reviews were what blew me away. Type in “presto canner walmart” in Google and read some of the reviews. Seriously. People rave about Presto’s products. There were people talking about how both their grandma and their Mom have used Presto, and they would never use any other brand of canner. The same raving reviews can be found on amazon.com and target.com. There are also frequent comments about the speed and responsiveness of customer service — also a good sign.
There is another company called All-American that produces canners, but their canners are more high-end. (They were No. 3 on amazon.com’s seller list.) Presto’s canners run around $80, and All-American’s are about $200. On canning websites, people recommend one or the other. It really is Presto or All-American. It’s like Coke or Pepsi. Who would have thought?
Presto has been making canners since 1905, and has been doing it with excellence for that entire time. If they didn’t have to meet the pricing demands of their suppliers, they would have broad-based pricing power. Presto is the Coca-Cola of canners.
I won’t bore you with the details of each individual item Presto produces, but it’s important to understand their business and the excellence of their housewares segment. A lot of people are interested in the high-growth absorbent products or the defense segment, but don’t discount Presto in housewares. Here are the category placements for Presto’s products in the amazon.com bestseller lists. Each item can be studied in detail, and read about in reviews, but this list will do for now:
(These lists are updated on Amazon hourly, so they might not be exactly right if you go check them out. At time of publishing though, they were correct.)
Presto holds the Nos. 1, 2 and 3 spots — a dominant position.
Also, they have Nos. 5, 6, 9, 11, 12, 13 and 20 — a cool top 10 of 20.
Presto holds the Nos. 1, 2 and 3 spots, in addition to 11, 16, 18, 19 and 20.
Presto holds the No. 1 spot. Also 4, 5 and 10.
(Their popcorn popper is the No. 5 best-selling item in the entire amazon kitchen and dining section. It has been in the best-selling 100 items for 2159 days (nearly six years) — more than any other kitchen/dining item on amazon.)
Presto holds the Nos. 1, 2, 3 and 5 spots.
Presto holds Nos. 2 and 7 spots.
No. 1 spot with its salad shooter
Presto holds the No. 2 spot.
Presto holds the No. 1 spot.
There are many reasons why Presto makes a strong showing in its appliances/housewares division, but there are two specific ones I would like to point out:
- A major part of the appliance business is coming up with new exclusive items, and Presto has done well over its history doing that. This next year will also see some exclusive items come out, which should help segment profitability.
- The small appliances industry has had an extremely difficult couple of decades, and Presto has navigated industry turbulence for years, largely based on their large cash position and cost efficiencies. (If you want to research an industry that has experienced massive wreckage over the past 20 years, check out the history of companies in the small kitchen appliances industry. I studied a number of past Presto competitors, and was astounded by how many competitor bankruptcies/mergers there have been in the last 20 years.)
The biggest risks to this segment are commodity costs, a fragile consumer economy, and being so dependent on retailers. This past year retailers like Wal-Mart and Target did not correctly anticipate customer demand during the holiday time, leaving empty space on the shelf when consumers were shopping for kitchen appliances. That largely cut into the segment profitability in 2011.
Long-term there are definitely risks involved with manufacturing kitchen appliances, but I believe the customer service, quality, and innovation of Presto housewares, combined with its financial strength, will allow it to maintain and grow its current position in its industry.
In 2001, NPK began acquiring businesses for an absorbent products segment which primarily produces private label diapers. There is also some production of Presto brand products, but the focus is on private label product. This is the segment that has been expanding the most in the last couple of years, spending over $23 million dollars on capital expenditures in 2010 and 2011.
It is a low-margin, high-volume business, and while capital expenditures have been high the last few years, it is a capital intensive business in general. That said, NPK has both the cash and managerial patience to see the expansion through, and I think their new machines will pay dividends (literally) in the long run.
Here are the operating details for the Absorbent Product segment:
| Segment EPS |
|$ 0.21||$ 0.77||$ 0.63||$ (0.12)||$ (0.28)||$ (0.76)||$ (0.88)||$ 0.15||$ 0.08||$ (0.02)|
Major producers of adult absorbent products include Kimberly-Clark (Depend brand), SCA (Tena brand), and First Quality Products (Prevail brand), but because Presto primarily produces private label product, they are not in direct competition with these companies. They don’t have to advertise or spend money marketing their products.
The primary storyline in this segment is the potential loss of one customer, Medline Industries. Medline accounts for a significant 11% amount of consolidated net sales, and has announced they are going to be building their own manufacturing plant to produce their own product. Many people reading that are ringing alarm bells, but, while it is a concrete risk to NPK, it is a known risk and NPK has been performing a customer diversification program during the last few years. This program has been decreasing NPK’s dependence on Medline. Here are the stats for the last few years of absorbent product revenues from Medline:
|Ab. Products Customer Concentration (in thousands)||2011||2010||2009||2008||2007||2006|
|Net Absorbent Product Revenues||97,797||80,764||74,663||72,661||65,065||53,377|
|Medline Industries as % of Company Sales||12%||11%||12%||12%||13%||14%|
|Revenue from Medline||51,722||52,690||57,416||53,787||54,693||45,702|
|Medline Industries as % of Segment Sales||53%||65%||77%||74%||84%||86%|
|Total Revenues without Medline||46,075||28,074||17,247||18,874||10,372||7,675|
Fifty-three percent is still a high number, but it will continue to take Medline time to be able to produce $50 million dollars worth of diapers. The current contract with Medline is in operation till September 2012. It will be interesting to see what happens then. I anticipate that Medline will sign another contract, but it will be for decreasing amounts of product — I don’t anticipate Medline’s manufacturing facilities to be fully ready to take over total production by this September.
The most promising growth segment at National Presto Industries is in the absorbent products segment. Demographically, it fits with growing trends in the U.S., and few companies have the ample cash and patience readily available to fund rapid growth in this capital-intensive business. In addition, Presto excels at keeping costs low, which will allow it to compete effectively.
Here are the segment specifics:
| Segment EPS|
|$ 5.21||$ 5.82||$ 5.52||$ 4.45||$ 3.87||$ 2.31||$ 0.70||$ 0.56||$ 0.19||$ 0.25|
This segment is, in my opinion, at least part of the reason for NPK’s declining stock price. During the past few years the majority of NPK’s revenues, profits, cash flows, and dividends have come from defense-related sales. It is easy to see how news stories about troops withdrawing from conflict zones, or the significant decrease in the U.S. defense budget would cause investors to take flight from defense stocks as a whole, and NPK in particular.
However, there are two key aspects of NPK’s defense segment that those selling the stock are missing. These are:
1. The sizable backlog. At year-end 2011, NPK had a backlog of $342 million dollars of deliveries to take place in 2012 and 2013. In April, NPK was awarded an $81 million option award for 40mm ammunition, for deliveries in 2013 and 2014. Thus, we know with decent certainty that in the next two years NPK has roughly $380 million in defense revenues coming in, with at least an additional $40 million in 2014.
This past year, NPK’s defense revenues were $200 million. Do the math. Not all of NPK’s defense revenues come from that backlog, so, barring the canceling of projects from the Army, defense revenues for 2012 and 2013 are fairly set. No reason for alarm on a short-term (two-year) basis.
Investors selling shares did not notice this comment in the 2011 10-K:
“Defense net sales decreased by $38,390,000, from $240,762,000 to $202,372,000, or 16%, primarily reflecting a decrease in unit shipments, which has had the effect of deferring sales to a later date.”
Long-term investors realize that sometimes shipments vary from year to year, and don’t sell without reading why the segment underperformed in the short-term.
What about long-term, though? The big question I want to answer is how sustainable NPK’s defense revenues are. That leads us to point number two:
2. The US Department of Defense budget. The single biggest contract of this segment is the 40mm contract with the U.S. DoD. It’s been roughly half of total segment revenues during the past six years, as you can see in the following table:
| 40mm program details |
|Deliveries Under the 40mm program||92,000||139,700||149,000||140,000||122,000||57,000|
|Net Defense Revenues||202,372||240,762||253,789||238,752||224,384||126,849|
|40 mm program as % of Defense Sales||45%||58%||59%||59%||54%||45%|
To try to understand the long-term ammunition issue, I went to the US DoD website and downloaded the past five years of annual DoD budgets. There is actually a little line in each year’s 245-page budget book that gives estimated numbers for “Army ammunition procurement” all the way until 2017, which is extremely convenient.
We’ll first look at the big picture. Here are the figures from the most recent overall US DoD budget, with the Army’s numbers included:
|Department of Defense Budget- in millions||2011||2012||2013||2014||2015||2016||2017|
| Current Dollars|
(adjusted for inflation)
|Total DoD Budget||690,781||650,558||620,274||539,669||551,975||561,970||573,333|
As you can see, the Army’s base budget is set to go down 43% and the total DoD base budget is set to go down 17%. NPK produces goods for the Army, so at first glance a 43% drop is scary.
To learn more, we need to view the Army ammunition budget specifics. In the following chart, “Budget Authority” means the actual, current budget, and “Outlays” represents cash expenditures/payments by the DoD for Army ammunition. Here are the specifics for the Army ammunition budget:
| Procurement: |
| Current Dollars |
(adjusted for inflation)
Average Budget- 2006-2011: $2,391
Average Budget- 2012-2017: $1,869
% difference= 22%
Average Outlays- 2006-2011- $2,319
Average Outlays- 2012-2017- $2,113
% difference- 9%
One tough aspect of estimating long-term sustainable ammunition revenues is that it’s almost impossible (I couldn’t figure it out) to learn the actual connection between the budgeted amount to actual outlays (cash payments). In addition to that, it’s also confusing because every year there is a base budget, with an added amount for Overseas Contingency Operations, but that amount is not included in the estimated budget for the next five years.
I spent a lot of time looking at the budget numbers, and I think there are two key takeaways.
1. According to the current budget, the US Army as a whole is taking a 43% budget cut over the next 5-6 years. That’s obviously a major cut, but the cuts aren’t coming from ammunition; they’re primarily coming from Army “Operations and Maintenance,” a different budget category. Ammunition budgets are slated to take a 20-25% budget cut, depending on what year of figures you use.
I think that, in practicality, the ammunition budget will drop something more like 10 to 15%, because each budget above for future years is the base budget. Every year there is also the OCO (Overseas Contingency Operations) budget add-on. In addition, there are already outlays (i.e. expenditures of cash) scheduled in excess of the budget for future years.
For estimates, though, and to have a margin of safety, I am estimating long-term sustainable defense revenues to be 30% less than the past five-year (wartime) average. The average NPK revenues from defense for the past 5 years is $230 million, so a sustainable amount from 2014 and beyond, in my opinion, is $160 million. (Remember that 2012 and 2013 are already largely set). That is a quite conservative number, but there is contractual risk involved with the DoD, so it never hurts to be more conservative. $160 million in revenue is roughly equivalent (by use of past estimates) to $4 a share in earnings.
2. The biggest risks involved with this segment are thus not related to troop withdrawals from Iraq and Afghanistan. They are a) having one customer accounting for a large amount of revenue, and b) contracts are performed on a fixed-price basis. If the cost of materials goes up, NPK makes less money, and vice versa. If the US DoD does not renew the ammunition contract in 2014, this will most definitely affect NPK’s long-term earnings, but I think the long-tern $160 million number does incorporate a lot of that risk.
National Presto is cognizant of the risks inherent in having one primary customer and this past year, they acquired a small “less than lethal” business that provides tear gas and other similar products to police forces, etc. The company has annual revenues of about $8 million, with a lot less geopolitical risk involved. I anticipate they will continue to make acquisitions that diversify their defense business.
One final note: This is not NPK’s first “defense segment” rodeo. They have had defense segments in the past, and are experienced in dealing with defense contractors. Management was quite aware of the risks and rewards inherent in defensive industries when entering contracts with the US DoD.
In short, I believe that the defense segment, even without any major military conflicts, will continue to provide sustainable revenue and strong dividends for NPK shareholders. The budget cuts and troop withdrawals will cause an eventual decrease in revenues, but it will not affect the long-term sustainability of that income.
Management at NPK is superb. I’ll elaborate in case you don’t believe me. Here’s why they’re great:
-The CEO (Maryjo Cohen) and leadership team don’t care what Wall Street thinks, but they care deeply about their business. Ms. Cohen’s father was CEO before her, and thus she has been associated with NPK since birth. It is, for all intents and purposes, a family business. Her father, Melvin Cohen, was the one Warren Buffet called one of his “home-run hitters.”
- There is high (30%) insider ownership by the CEO, Ms. Cohen.
-No one is trying to build empires. The vast majority of all earnings (85 to 90%) are distributed to shareholders, because shareholders are viewed as genuine owners of the business.
- Management is focused on limiting costs, which allow it to compete in its highly competitive markets.
- Honesty permeates all official communication. Ms. Cohen tells it like it is in her annual letters. Business is accepted with all of its ups and downs.
- According to this Forbesarticle, Ms. Cohen stays at Holiday Inns, travels coach and still lives with her mother, even though her net shares of NPK are worth roughly $150 million.
- If you still have doubts regarding management, read this correspondence between Melvin and Maryjo Cohen and some analysts. I think most gurufocus readers would find it an enjoyable and entertaining read. (Make sure you get down to the Cohen replies!)
NPK truly has a fortress balance sheet. They have no long-term debt. They are swimming in cash. The SEC actually went to court a few years ago to attempt to have NPK reclassified as an investment company because they held so much cash, but failed.
NPK’s current ratio is 5, it has $133 million in cash (25% of total market cap), and tangible assets are $46 a share. (Current share price is $72.)
In addition to those numbers, free cash flow (primarily from the defense segment) has been strong (nearly 10% of current market cap) and has primarily been utilized to pay shareholder dividends the last five years:
2007- $32 million
2008- $31 million
2009- $59 million
2010- $40 million
2011- $44 million
Some analysts have recommended NPK put its cash to work in other areas other than municipal bonds, U.S. treasuries and periodic acquisitions, but NPK management manages the various risks of business by maintaining a strong cash hoard. NPK management has proven time and again that they are extremely wise with their money. They move fast and buy companies that fit their long-term goals.
In this way, they remind me of Berkshire Hathaway (BRK.B). Warren Buffett has emphasized the need to always have enough cash on hand to take advantage of opportunities, and NPK illustrates that principle on a smaller level.
National Presto has paid a dividend for 68 consecutive years — since 1945 — but they have a unique dividend policy. They pay a one-time, regular dividend of $1 a year, but they also pay a “special dividend” of extra earnings in addition to the one-time dividend every March. Their dividend payments are not quarterly, like most dividend-payers, and they have no problem paying a lower dividend if their businesses didn’t do so well that year. If business does well, shareholders get more dividends. If the business does poorly, the shareholders do not benefit as much. While inconvenient to individuals seeking regular, anticipated income each year, it’s also real life. Businesses have good and bad years.
This past year, National Presto Industries paid a $6 dividend from $6.98 EPS. I believe that the dividend could be $6, or higher, for the next two years. Defense revenues are largely assured. Housewares is going to be introducing some exclusive products this year, and the absorbent products segment continue to grow.
At current prices ($72), a $6 dividend is an 8.33% yield. At $75, it’s an 8% yield. Keeping the same dividend is, in my opinion, a conservative guess. It could well be higher. In addition, once other investors realize that they oversold NPK and that its quarterly earnings are higher, it’s likely they’ll connect the dots. There’s no way that the share price will remain $73 if a $6 dividend is going to be paid. I think the share price could rise to $100 in the next year or so, as many investors would be happy to pay that for a 6% yield.
I don’t believe in short-term speculation, but I do believe that when investors realize that the dividend is not in as much danger as currently thought, the share price will benefit. It’s not every day that you get the opportunity to purchase a quality company at a reasonable price with a sustainable, 8% dividend. Regardless of what other investors do regarding the share price, it has to be at least worthy of consideration for investors that enjoy receiving dividends.
Long-term (2014 and beyond), as mentioned above, I believe that defense revenues can be conservatively calculated at around $160 million, which would be roughly $4 EPS. Add in to that the $2.30 EPS average for housewares the last 5 years, and a mere $0.70 EPS from the diaper business, and that’s $7 in earnings per share. That would imply a sustainable dividend, if everything remains constant, of $6 a share.
The future is obviously unknown, and this is just my conservative conjecture, but at today’s prices that is a probable 8% cash yield on cost for the next decade.
For those who prefer a quarterly dividend, it’s still possible to get a rough check on how much the dividend will be at the end of the year. Each quarter, check out the earnings, and then estimate 75% of that to be received in the annual dividend (to be safe, the past five years NPK has averaged a 86% payout rate).
There’s a reason why the stock is so cheap. There are risks. Many of the risks I discussed in each segment above, but to recap, here are the big ones:
- Commodity costs — for all three segments. A major increase in commodity prices could greatly lower bottom-line figures business-wide.
- Dependence on certain customers — Medline, the U.S. DoD and Wal-Mart.
- Termination clauses on defense contracts — the government can cancel contracts at its convenience. Less than three weeks ago another $81 million dollar award was announced, so termination does not appear likely. The bigger long-term risk will be the renewal of the ammunition contract in 2015.
- Sourcing of products from the Orient — NPK produces its housewares in Asia.
- High unemployment and uncertain economy — consumers will be less likely to purchase highly discretionary kitchen appliances.
-Transportation and fuel costs.
-Interest rate risk. From 2006-2008 NPK was earning close to $4 million a year merely from interest, but this past year their interest income was only $1 million.
All of those risks are cushioned by the strong cash position of NPK, and similar risks have been managed with excellence by management in the past. If NPK did not have such a strong cash position, was over-laden with debt, and management did not have a track record of excellence in uncertain times, purchasing NPK would be possibly be higher risk than the return would be worth. However, with tangible assets of over $46 a share, and a management that hates wasting assets, there is a fairly solid foundation on which to rest.
At current prices of $72, here’s what you are getting:
1. A quality, century-old company with a P/B of 1.45 a P/E of 10.25 and a P/S of 1.13.
2. Cash and Marketable Securities — nearly $20 a share. (These balances are primarily in municipal bonds and US treasuries.) Equivalent to 28% of the share price.
3. Add cash in with other tangible assets, subtract deferred tax liabilities, and you have a value of $46.25 for tangible assets per share.
So, that means right now at a price of $72, one is paying $26 per share for all future earnings and dividends of a company with a stable history, good free cash flow, a strong history of acquisitions, and an extremely capable, honest and shareholder-friendly management.
In addition to that, part of our analytical work is done already, because of the defense backlog and additional option award on April 2. If you estimate the earnings just from those backlog revenues, and discount the earnings for future years, you get another $10 in earnings ($9 in probable dividends) alone — just from the already known.
So, that leaves $16 a share for the superb management, and all of the future earnings/dividends from the appliance business, the diaper business, and the defense business that wasn’t included in the backlog.
In my opinion, NPK below $75 is a great stock to own. It is not for the risk-averse, to be sure. Both the business and the share price will have its ups and downs over the next decade, but even if the share price does nothing, I believe that the dividends alone are enough to beat the S&P 500 over the next 10 years. I do think that the share price will eventually reflect the dividend, but only time will tell when that will happen.
NPK is a small company, so it doesn’t find a place in many guru portfolios. Only 3 gurus report positions in NPK- Joel Greenblatt, John Keeley, and Mario Gabelli. Joel Greenblatt has been adding to the position, Mario Gabelli reducing, and John Keeley maintaining.
John Keeley has the highest conviction in NPK and holds nearly 2% of all of NPK’s outstanding shares.
Disclosure: I purchased shares in NPK this morning at $72.40, and plan to hold indefinitely. I am also long BRK.B.