The business of National Presto Industries, Inc. (the “Company" or “National Presto”) consists of three business segments. The Housewares/Small Appliance segment designs, markets and distributes housewares and small electrical appliances, including pressure cookers and canners, kitchen electrics, and comfort appliances. The Defense Products segment manufactures 40mm ammunition, precision mechanical and electro-mechanical assemblies, medium caliber cartridge cases, and performs Load, Assemble and Pack (LAP) operations on ordnance-related products primarily for the U.S. government and prime contractors. The Absorbent Products segment manufactures and sells primarily private label adult incontinence products and diapers.
NPK SELECTED FINANCIALS 2001-2010
Valuation
As can be seen from the table above, NPK is currently trading at very low multiples on earnings on a trailing basis. Cash flows jump around and the multiple is a bit high on that measure. Reasons for cheap valuations are lower Q1 earnings and management warning that inflationary forces will impact entire 2011.
Historical Valuation
Next, we take a look at the historical valuation of NPK. Using Capital IQ, we obtained average valuation multiples for the period 2005-2010. NPK is trading slightly below its historic avg multiple when using EV/EBIT. It seems much cheaper when looking at avg P/E multiple. On EV/ Sales, seems 30% higher.
Profitability
As can be seen from tables below, NPK has improved its gross margins from 18% in 2008 to almost 24% in 2010. This needs to be looked at and understood. This has driven profitability higher as can be seen in Returns on assets/equity/capital.
Growth Rates
NPK has grown by leaps and bounds over the 5 year period from top to bottom line.
Segments
Housewares /Small appliance
· Housewares and electrical appliances sold by the Company include 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); microwave bacon cookers; coffeemakers and coffeemaker accessories; electric tea kettles; electric knife sharpeners; shoe polishers; and timers. Pressure cookers and canners are available in various sizes and are fabricated of aluminum and, in the case of cookers, of stainless steel, as well.
· The business is seasonal, with the normal peak sales period occurring in the fourth quarter of the year prior to the holiday season. This segment operates in a highly competitive and extremely price sensitive environment.
Defense segment
· AMTEC Corporation was acquired on February 24, 2001, and manufactures 40mm ammunition, and precision mechanical and electro-mechanical products for the U.S. Department of Defense (DOD) and DOD prime contractors. AMTEC’s 75,000 square foot manufacturing facility located in Janesville, Wisconsin is focused on producing niche market ordnance products (such as training ammunition, fuzes, firing devices, and initiators). AMTEC is also the majority prime contractor for the 40mm ammunition system to the DOD (more fully described below).
· Spectra Technologies LLC, a subsidiary of AMTEC, was acquired on July 31, 2003, and is engaged in the manufacture and delivery of munitions and ordnance-related products for the DOD and DOD prime contractors. Spectra maintains 314,000 square feet of space located in East Camden, Arkansas, dedicated primarily to Load, Assemble and Pack (LAP) type work and during 2008 completed a facility which enabled it to begin performance in 2008 of LAP work for the 40mm systems program previously mentioned and referenced below.
· Amron, a division of AMTEC, holds the assets that were purchased from Amron LLC on January 30, 2006. Amron manufactures cartridge cases used in medium caliber ammunition (20mm, 25mm, 30mm and 40mm) primarily for the DOD and DOD prime contractors, which includes the 40mm systems program previously mentioned and referenced below. The Amron manufacturing facility is 208,000 square feet and is located in Antigo, Wisconsin.
· On April 25, 2005, AMTEC Corporation was awarded the high volume, five-year prime contract for management and production of the Army’s 40mm Ammunition System. The Army selected AMTEC as one of two prime contractors responsible for supplying all requirements for 40mm practice and tactical ammunition for a period of five years. AMTEC was awarded the majority share of requirements, and the Army estimated the total for the two contract awards, if all of the options were fully exercised, to be $1.3 billion. AMTEC projects that its deliveries under the contract will exceed $667,000,000. Deliveries under the system program were $139,700,000 during 2010. On February 18, 2010, the Army awarded AMTEC a second five-year contract for the management and production of the 40mm Ammunition System. As in the original 5-year contract, AMTEC was awarded the majority share of the 40mm requirement. The first year requirements awarded to AMTEC under the new five-year contract exceeded $183,400,000. The actual and cumulative dollar volume with the Army over the remaining four years of the contract will be dependent upon military requirements and funding, as well as government procurement regulations and other factors controlled by the Army and the Department of Defense.
· During 2010, almost all of the work performed by this segment directly or indirectly for the DOD was performed on a fixed price basis. Under fixed-price contracts, the price paid to the contractor is awarded based on competition at the outset of the contract and therefore is generally not subject to adjustments reflecting the actual costs incurred by the contractor, with the exception of some limited escalation clauses, which on the newest contract apply to only three materials – steel, aluminum and zinc. The Defense segment’s contracts and subcontracts contain the customary provision permitting termination at any time for the convenience of the government, with payment for any work completed, associated profit and inventory/work in progress at the time of termination.
Absorbent Products Segment
· The first Absorbent Products segment business (Presto Absorbent Products, Inc.) was formed on November 21, 2001 to purchase assets from RMED International, a company that manufactured primarily private label diapers. On October 6, 2003, the Company purchased the assets of NCN Hygienic Products, Inc., a Marietta, Georgia company which manufactured adult incontinence products and pads for dogs, which were likewise primarily private label products. Focus continues to be on private label, although branded product is produced under the “PRESTO” label. The absorbent products business is capital intensive and substantial investment in new equipment was made during 2004 and 2005. New absorbent product equipment is extremely complex. Not only is considerable time required to secure and install the equipment, but even more time is required to develop the requisite employee skill sets to utilize the equipment efficiently. Sales channels must be in place to sell the increased production that results from new equipment and improved efficiency in operations.
· During the fourth quarter of 2006, in order to enhance the Absorbent Products segment’s long-term manufacturing efficiencies, the Company decided to consolidate its adult incontinence production capabilities and, as a result, began the process of relocating its adult incontinence manufacturing equipment from its Marietta, Georgia facility to its Eau Claire, Wisconsin facility. In addition, the Company made a decision to discontinue the manufacture of dog pads, a business which did not fit the long-term Absorbent Products segment strategy. This transition was largely completed by the end of the first quarter of 2007.
· The absorbent product industry is a very competitive, high volume-low margin business. There are several competitors, most of which are larger than this segment of the Company. Product competition is largely based on product pricing, quality, and features. Product cost is heavily influenced by commodity costs which include wood pulp, as well as many petroleum based products, and by equipment operating speed, efficiency, and utilization.
· For the years ended December 31, 2010, 2009, and 2008, this segment had one customer, Medline Industries Holdings LP, which accounted for 11%, 12%, and 12%, respectively, of consolidated net sales.
· The segment, which enjoyed its first truly profitable year in 2009, has been experiencing capacity constraints and has received Board authorization for a $30 million expansion. To date, it has ordered one multi-million dollar machine, which will be installed in the Eau Claire, Wisconsin facility during March of 2011, begun construction of a warehouse addition to the current facility in Eau Claire, and is in the process of installing an automated handling system. All should be in operation in the second quarter of 2011.
Segment Financials
Inventory
· The ability to meet U.S. Department of Defense demands also necessitates the carrying of large inventories in the Defense segment.
· Buying practices of the Company's customers require "just-in-time" delivery, necessitating that the Company carry large finished goods inventories.
· The multiple stock keeping units inherent in the private label absorbent product business, combined with the desire to avoid excessive machine changeover (which can have a negative impact on efficiency), necessitates the carrying of a large finished goods inventory in the Absorbent Product segment as well
Backlog
The contract backlog of the Defense segment was approximately $329,000,000
Things I like
· Strong balance sheet with $150 million in cash and no debt. (20% of market cap)
· Insider holding: CEO Maryjo Cohen owns 30% of the shares outstanding
· Good track record of making and merging acquisitions that added significant value.
· Low valuation 6x EBIT.
· Stable returns on equity. (ROE 12-15%)
· High total dividend payout. Regular dividend is $1 per share which works out to only a 0.9% dividend yield. However, NPK has consistently paid out an annual special dividend in the month of March since FY 2004. The dividends were $0.25, $0.75, $1.2, $2.85, $3.25, $4.55 and $7.15. On a trailing basis, the total $8.15 dividend works out to a 7.7% yield.
· Overall a low capex business.
· Share price hit a peak of $137 on Jan 14. Stock is down 21% since then. Some of it is could be the drop after the large special dividend payout.
· No share dilution
Concerns
Customer concentration:
· One major risk factor is the concentration in the customer base. Defense products segment (50% of sales) depends on US govt. However, they have a long term contract till 2015.
· Walmart is main customer in housewares segment (11% of sales).
· In September of 2009, the Company entered a two-year private label manufacturing agreement with Medline for the Absorbent products segment. The agreement provides a framework for an ongoing relationship between the parties and ends in September 2011. Medline accounted for more than 10% of sales in last 3 years.
Inflation and higher input price risk
· Fixed price contract in Defense segment makes it challenging in times of inflation.
· In Housewares segment, products are sourced from China. With rising labor wages and Yuan rising as well, it could increase sourcing costs. These may not be easily passed to consumer in US due to extreme competition.
· Freight costs affects its Absorbents segment
Lack of pricing power
Commodity-like products in 2 of the 3 segments.
Fixed cost pricing in defense products segment. Defense budget cut could impact sales and margins.
Why is the stock cheap
Further commodity and freight cost increases are anticipated during the upcoming year. Effects of the increases are expected to have a deleterious impact on all three business segments, but in particular Housewares/Small Appliance and Absorbent Products. Offsetting price increases are not expected.
Potential of Peak Margins
Potential of top line decrease in defense segment which makes up 50% of sales.
Major Acquisitions by NPK
Conclusion:
Given some of the macro risks (defense spending, inflation, freight cost, supply cost issues in China), we need a large margin of safety. Earnings and margins could have peaked over last 2 years. Need to model normalized earnings power based on margin reversion.
I assume analysts are expecting EPS to drop from $9.2. If you see sales of last 4 years, for similar sales level $421 to $479 (15% upside), net income went from $39 to $64 million (50% upside). Average is $50 million. That would give us about $7 eps. At current price of $107, this would be a 15x forward earnings. Not so cheap if that were to pan out.
So, would like to pay 12x forward earnings assuming a drop from $9.2 to $7. That gives an $85 as an entry price.
Re-visit when stock comes around $95 or so.
Disclosure: No position
| May 18, 2011 | |
| Last Close Price | 106.40 |
| Diluted Shares Outstanding (millions) | 7 |
| Market Cap (millions) | 730.97 |
| Net Cash (millions) | 150.72 |
| Enterprise Value (millions) | 580 |
| EBITDA (millions) | 106 |
| Currency | USD |
NPK SELECTED FINANCIALS 2001-2010
| Fiscal Year | Sales | Op Income | Net Income | Diluted EPS | OCF | Capex | FCF | DPS | Shares |
| 2001 | 119 | 5 | 6 | 0.92 | (6) | (3) | (9) | 2.00 | 7 |
| 2002 | 125 | 11 | 9 | 1.27 | 26 | (4) | 22 | 0.92 | 7 |
| 2003 | 126 | 22 | 15 | 2.27 | 22 | (2) | 21 | 0.92 | 7 |
| 2004 | 159 | 23 | 15 | 2.26 | 6 | (28) | (22) | 1.17 | 7 |
| 2005 | 185 | 24 | 16 | 2.40 | 22 | (14) | 8 | 1.67 | 7 |
| 2006 | 305 | 37 | 28 | 4.09 | 6 | (8) | (2) | 2.12 | 7 |
| 2007 | 421 | 54 | 39 | 5.65 | 38 | (7) | 31 | 3.80 | 7 |
| 2008 | 448 | 63 | 44 | 6.45 | 35 | (6) | 29 | 4.25 | 7 |
| 2009 | 478 | 92 | 63 | 9.13 | 62 | (4) | 58 | 5.55 | 7 |
| 2010 | 479 | 97 | 64 | 9.26 | 58 | (17) | 41 | 8.15 | 7 |
Valuation
| P/E | 11.5 |
| P/E adjusted for Net Cash | 9.1 |
| EV / EBIT | 6.0 |
| EV/ EBITDA | 5.5 |
| EV / Sales | 1.2 |
| P / Tangible Book | 2.2 |
| P / FCF | 17.8 |
| EV / FCF | 14.1 |
| EV/OCF | 10.0 |
| Computed Dividend Yield | 7.7% |
| Payout ratio | 88.0% |
As can be seen from the table above, NPK is currently trading at very low multiples on earnings on a trailing basis. Cash flows jump around and the multiple is a bit high on that measure. Reasons for cheap valuations are lower Q1 earnings and management warning that inflationary forces will impact entire 2011.
Historical Valuation
Next, we take a look at the historical valuation of NPK. Using Capital IQ, we obtained average valuation multiples for the period 2005-2010. NPK is trading slightly below its historic avg multiple when using EV/EBIT. It seems much cheaper when looking at avg P/E multiple. On EV/ Sales, seems 30% higher.
| Historical Valuation | 12/31/2005 | 12/31/2006 | 12/31/2007 | 12/31/2008 | 12/31/2009 | 12/31/2010 | Average | Today |
| EV/Sales | 0.8 | 1.1 | 1.0 | 0.7 | 0.9 | 1.3 | 0.9 | 1.2 |
| EV/EBITDA | 5.3 | 7.2 | 6.3 | 4.7 | 5.0 | 6.0 | 5.7 | 5.5 |
| EV/EBIT | 6.1 | 8.6 | 7.6 | 5.4 | 5.6 | 6.6 | 6.7 | 6.0 |
| P/E | 19.5 | 18.0 | 14.8 | 11.1 | 10.9 | 12.0 | 14.4 | 11.5 |
| P/TBV | 1.2 | 1.5 | 1.5 | 1.6 | 1.9 | 2.5 | 1.7 | 2.2 |
| P/BV | 1.2 | 1.5 | 1.5 | 1.5 | 1.8 | 2.4 | 1.6 | 2.1 |
Profitability
As can be seen from tables below, NPK has improved its gross margins from 18% in 2008 to almost 24% in 2010. This needs to be looked at and understood. This has driven profitability higher as can be seen in Returns on assets/equity/capital.
| Profitability | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | Average |
| ROA % | 4.9 | 7.2 | 9.5 | 10.7 | 14.9 | 14.8 | 10.3 |
| ROC % | 5.6 | 8.6 | 11.8 | 13.1 | 17.7 | 17.9 | 12.4 |
| ROE % | 6.2 | 10.2 | 13.4 | 14.6 | 19.4 | 18.7 | 13.8 |
| Margin Analysis | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | Average |
| Gross Margin % | 20.7 | 18.8 | 18.4 | 17.9 | 23.0 | 23.7 | 20.4 |
| EBIT Margin % | 12.9 | 12.3 | 12.9 | 14.1 | 19.2 | 20.3 | 15.3 |
| NI Margin % | 8.9 | 9.2 | 9.2 | 9.9 | 13.1 | 13.3 | 10.6 |
| FCF Margin % | 4.5% | -0.8% | 7.4% | 6.5% | 12.2% | 8.5% | 6.4% |
| Asset Turnover | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | Average |
| Total Asset Turnover | 0.6 | 0.9 | 1.2 | 1.2 | 1.2 | 1.2 | 1.1 |
| A/R turnover | 6 | 6 | 5 | 5 | 6 | 5 | 5.6 |
| Inventory turnover | 4.1 | 5.3 | 5.7 | 5.4 | 5.3 | 4.8 | 5.1 |
Growth Rates
NPK has grown by leaps and bounds over the 5 year period from top to bottom line.
| CAGR Growth Rates | 3 year | 5 year | 7 year | 10 year |
| Revenue | 4 | 21 | 21 | 15 |
| EBIT | 21 | 32 | 24 | 27 |
| Net Income | 18 | 31 | 22 | 15 |
| EPS | 18 | 31 | 22 | 16 |
| Tangible Book value | 5 | 5 | 4 | 3 |
| Cash from Ops | 15 | 21 | 15 | 16 |
| Dividend per share % | 2 | 2 | 1 | -7 |
Segments
Housewares /Small appliance
· Housewares and electrical appliances sold by the Company include 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); microwave bacon cookers; coffeemakers and coffeemaker accessories; electric tea kettles; electric knife sharpeners; shoe polishers; and timers. Pressure cookers and canners are available in various sizes and are fabricated of aluminum and, in the case of cookers, of stainless steel, as well.
· The business is seasonal, with the normal peak sales period occurring in the fourth quarter of the year prior to the holiday season. This segment operates in a highly competitive and extremely price sensitive environment.
Defense segment
· AMTEC Corporation was acquired on February 24, 2001, and manufactures 40mm ammunition, and precision mechanical and electro-mechanical products for the U.S. Department of Defense (DOD) and DOD prime contractors. AMTEC’s 75,000 square foot manufacturing facility located in Janesville, Wisconsin is focused on producing niche market ordnance products (such as training ammunition, fuzes, firing devices, and initiators). AMTEC is also the majority prime contractor for the 40mm ammunition system to the DOD (more fully described below).
· Spectra Technologies LLC, a subsidiary of AMTEC, was acquired on July 31, 2003, and is engaged in the manufacture and delivery of munitions and ordnance-related products for the DOD and DOD prime contractors. Spectra maintains 314,000 square feet of space located in East Camden, Arkansas, dedicated primarily to Load, Assemble and Pack (LAP) type work and during 2008 completed a facility which enabled it to begin performance in 2008 of LAP work for the 40mm systems program previously mentioned and referenced below.
· Amron, a division of AMTEC, holds the assets that were purchased from Amron LLC on January 30, 2006. Amron manufactures cartridge cases used in medium caliber ammunition (20mm, 25mm, 30mm and 40mm) primarily for the DOD and DOD prime contractors, which includes the 40mm systems program previously mentioned and referenced below. The Amron manufacturing facility is 208,000 square feet and is located in Antigo, Wisconsin.
· On April 25, 2005, AMTEC Corporation was awarded the high volume, five-year prime contract for management and production of the Army’s 40mm Ammunition System. The Army selected AMTEC as one of two prime contractors responsible for supplying all requirements for 40mm practice and tactical ammunition for a period of five years. AMTEC was awarded the majority share of requirements, and the Army estimated the total for the two contract awards, if all of the options were fully exercised, to be $1.3 billion. AMTEC projects that its deliveries under the contract will exceed $667,000,000. Deliveries under the system program were $139,700,000 during 2010. On February 18, 2010, the Army awarded AMTEC a second five-year contract for the management and production of the 40mm Ammunition System. As in the original 5-year contract, AMTEC was awarded the majority share of the 40mm requirement. The first year requirements awarded to AMTEC under the new five-year contract exceeded $183,400,000. The actual and cumulative dollar volume with the Army over the remaining four years of the contract will be dependent upon military requirements and funding, as well as government procurement regulations and other factors controlled by the Army and the Department of Defense.
· During 2010, almost all of the work performed by this segment directly or indirectly for the DOD was performed on a fixed price basis. Under fixed-price contracts, the price paid to the contractor is awarded based on competition at the outset of the contract and therefore is generally not subject to adjustments reflecting the actual costs incurred by the contractor, with the exception of some limited escalation clauses, which on the newest contract apply to only three materials – steel, aluminum and zinc. The Defense segment’s contracts and subcontracts contain the customary provision permitting termination at any time for the convenience of the government, with payment for any work completed, associated profit and inventory/work in progress at the time of termination.
Absorbent Products Segment
· The first Absorbent Products segment business (Presto Absorbent Products, Inc.) was formed on November 21, 2001 to purchase assets from RMED International, a company that manufactured primarily private label diapers. On October 6, 2003, the Company purchased the assets of NCN Hygienic Products, Inc., a Marietta, Georgia company which manufactured adult incontinence products and pads for dogs, which were likewise primarily private label products. Focus continues to be on private label, although branded product is produced under the “PRESTO” label. The absorbent products business is capital intensive and substantial investment in new equipment was made during 2004 and 2005. New absorbent product equipment is extremely complex. Not only is considerable time required to secure and install the equipment, but even more time is required to develop the requisite employee skill sets to utilize the equipment efficiently. Sales channels must be in place to sell the increased production that results from new equipment and improved efficiency in operations.
· During the fourth quarter of 2006, in order to enhance the Absorbent Products segment’s long-term manufacturing efficiencies, the Company decided to consolidate its adult incontinence production capabilities and, as a result, began the process of relocating its adult incontinence manufacturing equipment from its Marietta, Georgia facility to its Eau Claire, Wisconsin facility. In addition, the Company made a decision to discontinue the manufacture of dog pads, a business which did not fit the long-term Absorbent Products segment strategy. This transition was largely completed by the end of the first quarter of 2007.
· The absorbent product industry is a very competitive, high volume-low margin business. There are several competitors, most of which are larger than this segment of the Company. Product competition is largely based on product pricing, quality, and features. Product cost is heavily influenced by commodity costs which include wood pulp, as well as many petroleum based products, and by equipment operating speed, efficiency, and utilization.
· For the years ended December 31, 2010, 2009, and 2008, this segment had one customer, Medline Industries Holdings LP, which accounted for 11%, 12%, and 12%, respectively, of consolidated net sales.
· The segment, which enjoyed its first truly profitable year in 2009, has been experiencing capacity constraints and has received Board authorization for a $30 million expansion. To date, it has ordered one multi-million dollar machine, which will be installed in the Eau Claire, Wisconsin facility during March of 2011, begun construction of a warehouse addition to the current facility in Eau Claire, and is in the process of installing an automated handling system. All should be in operation in the second quarter of 2011.
Segment Financials
| Sales | Gross Profit | Op Profit | Capex | |
| Housewares | $158 (33%) | $37 | $27.6 (28%) | $1.1 |
| Defense | $241 (50%) | $68 | $61 (63%) | $3.5 |
| Absorbent | $81 (17%) | $8.5 | $8 (8%) | $13.4 |
Inventory
· The ability to meet U.S. Department of Defense demands also necessitates the carrying of large inventories in the Defense segment.
· Buying practices of the Company's customers require "just-in-time" delivery, necessitating that the Company carry large finished goods inventories.
· The multiple stock keeping units inherent in the private label absorbent product business, combined with the desire to avoid excessive machine changeover (which can have a negative impact on efficiency), necessitates the carrying of a large finished goods inventory in the Absorbent Product segment as well
Backlog
The contract backlog of the Defense segment was approximately $329,000,000
Things I like
· Strong balance sheet with $150 million in cash and no debt. (20% of market cap)
· Insider holding: CEO Maryjo Cohen owns 30% of the shares outstanding
· Good track record of making and merging acquisitions that added significant value.
· Low valuation 6x EBIT.
· Stable returns on equity. (ROE 12-15%)
· High total dividend payout. Regular dividend is $1 per share which works out to only a 0.9% dividend yield. However, NPK has consistently paid out an annual special dividend in the month of March since FY 2004. The dividends were $0.25, $0.75, $1.2, $2.85, $3.25, $4.55 and $7.15. On a trailing basis, the total $8.15 dividend works out to a 7.7% yield.
· Overall a low capex business.
· Share price hit a peak of $137 on Jan 14. Stock is down 21% since then. Some of it is could be the drop after the large special dividend payout.
· No share dilution
Concerns
Customer concentration:
· One major risk factor is the concentration in the customer base. Defense products segment (50% of sales) depends on US govt. However, they have a long term contract till 2015.
· Walmart is main customer in housewares segment (11% of sales).
· In September of 2009, the Company entered a two-year private label manufacturing agreement with Medline for the Absorbent products segment. The agreement provides a framework for an ongoing relationship between the parties and ends in September 2011. Medline accounted for more than 10% of sales in last 3 years.
Inflation and higher input price risk
· Fixed price contract in Defense segment makes it challenging in times of inflation.
· In Housewares segment, products are sourced from China. With rising labor wages and Yuan rising as well, it could increase sourcing costs. These may not be easily passed to consumer in US due to extreme competition.
· Freight costs affects its Absorbents segment
Lack of pricing power
Commodity-like products in 2 of the 3 segments.
Fixed cost pricing in defense products segment. Defense budget cut could impact sales and margins.
Why is the stock cheap
Further commodity and freight cost increases are anticipated during the upcoming year. Effects of the increases are expected to have a deleterious impact on all three business segments, but in particular Housewares/Small Appliance and Absorbent Products. Offsetting price increases are not expected.
Potential of Peak Margins
Potential of top line decrease in defense segment which makes up 50% of sales.
Major Acquisitions by NPK
| Date | Target | Deal Size | Sales (Yr) | Deal/ Sales | P/B | Products and Markets Served |
| Jan 2006 | Amron LLC | $24 | $28 | 0.9x | Defense, cartridge cases | |
| Oct 2003 | NCN Hygienic | $13 | Adult incontinence products, training pads for pets. | |||
| Nov 2001 | Presto Absorbent Products | $8 | Adult incontinence products ,diapers, pads |
Conclusion:
Given some of the macro risks (defense spending, inflation, freight cost, supply cost issues in China), we need a large margin of safety. Earnings and margins could have peaked over last 2 years. Need to model normalized earnings power based on margin reversion.
I assume analysts are expecting EPS to drop from $9.2. If you see sales of last 4 years, for similar sales level $421 to $479 (15% upside), net income went from $39 to $64 million (50% upside). Average is $50 million. That would give us about $7 eps. At current price of $107, this would be a 15x forward earnings. Not so cheap if that were to pan out.
So, would like to pay 12x forward earnings assuming a drop from $9.2 to $7. That gives an $85 as an entry price.
Re-visit when stock comes around $95 or so.
Disclosure: No position
