Value Play: National Presto Industries (NYSE: NPK)

Guns or butter? Perhaps a crockpot, a waffle bowl maker or a pack of diapers?  Such is the odd range of products manufactured and sold by National Presto Industries (NPK). No doubt this is an eccentric portfolio of products but, like its namesake, Presto is magically producing profits.

Most investors would turn their tail when trying to untangle National Presto’s operating model. The company does not host quarterly conference calls, offers little financial detail in its SEC filings and has zero analyst coverage. It is the equivalent of a Wall Street hermit.

Yet like the Limoge china cup found beneath the rubble at a yard sale, this stock is overlooked and undervalued.

National Presto could earn $5.50 in 2015. Earnings for the fourth quarter are expected to be announced mid-month. Cash per share equalled $9.00 last September, a number that should climb after collections for it highly profitable fourth quarter. If profits increase just 15% in 2016 the stock could hit the low 90’s.

National Presto was founded in 1905 as a manufacturer of industrial-sized pressure canners. In the early 1900’s pressure canning was thought to be the only safe and reliable method of preserving low acid foods. A commercial business selling this machinery boomed.

Bombs Away…

The United States entry into World War II in 1941 spurred the company to convert its factories into artillery manufacturing plants. Presto’s experience producing artillery fuses, aerial bomb and rocket fuses on mass scale has become a valuable asset. Defense made up 80% of profits in 2014, a percent that may increase slightly for 2015.

While defense revenue has been growing in the single digits profits from this segment have been exploding. Although part of this is due to higher revenue, it is also because of a more profitable product mix.

As part of a 2013 purchase of a small arms manufacturer, Presto agreed to fill that company’s backlogged orders at a predetermined price. This contracted price generated lower than average profits for Presto. As sales from this bucket have declined, overall profits have swelled. The benefits of this mix change are likely done as Presto has filled much of the backlog. Future profit growth in defense will come from increased revenue.

Bad news for peace is good news for Presto. And bad news reigns as increasingly volatile insurgencies call for more feet on the ground and increased small militia training. Presto provides both ammunition and training. Whatever your political stance, the U.S. Army seems ready and willing to support these efforts which will continue to drive defense revenue.

According to industry source Strategic Defense Intelligence, demand for rockets, artillery, and small caliber ammunition are expected to account for largest share of defense spending for the next ten years.Demand for these products, exactly the ones that Presto manufactures, is expected to grow 4% annually until at least 2025.

Waffle Bowl Anyone?...

One brief glance at National Presto’s website would have even the most adventurous cook scoffing at his boring wares. The Pizzazz Pizza Oven, the Powercrisp Microwave Bacon Cooker and the infamous Salad Shooter are just a few of the unique housewares invented and sold by the company.

Revenue from the houseware segment is highly seasonal with roughly 45% of sales occurring in the December quarter. After dropping 8% in 2014, houseware revenue is up mid single digits for the first 9 months of the year. However profitability has flourished 33% due to a mix of more profitable products.

In the Crapper…

National Presto’s adult diaper business, diplomatically named absorbent products, smells like well, you know. This is a tough business. Manufacturing and selling diapers requires buying incredibly expensive manufacturing equipment. This in itself would not be a bad thing if the product generated significant profits and allowed companies to earn back a return on the investment. Unfortunately the diaper business is highly competitive and generates razor thin margins.

This segment last produced a measureable profit in 2011. Since that time, losses have piled up in a stinking mess. Although losses have declined recently, we see little hope for regularity. There is little synergy between this business with the rest of the company.

While we don’t see the absorbent segment dragging down profits tremendously or eating up a lot of cash, it does remain a distraction and offers little benefit to the company.

Sweet Smelling Cash…

Outside of the foul diaper business National Presto is doing well. Profitability in both the defense and houseware segments have helped the company stockpile an arsenal of cash. As of its last reporting date (September quarter), it had $9.00 per share in cash.

The bulk of the company’s cash flow is generated in the December quarter when payments for houseware products are received. Cash per share should be higher when the company reports its fourth quarter.

National Presto has no debt and claims to have an uninterrupted 70 year history of paying dividends (our Bloomberg doesn’t go back that far!). As of last year, the regular annual dividend equaled $1.00 per share (1.28% yield), but the company has routinely paid out huge special dividends that cause the total annual payout to quadruple or more. For the past eight years (since 2008), the company has never paid out less than $4.25 per share. At the current stock price of $76.61, that minimum $4.05 payout equals a juicy 5.5% yield. The total dividend for 2016 will be announced in its upcoming fourth-quarter financial report, which should be released by mid-February.

Although National Presto’s financials aren’t as snazzy as its kitchen products, this cash cow should be able to cook up delicious returns for investors.

National Presto Industries is a buy up to $87; I’m also adding the stock to my Value Portfolio.

Value Sell Alert

To make room for National Presto Industries, Roadrunner is selling:

• RPC Inc. (RES)

With some analysts warning that oil could fall to $10-$20 per barrel and T. Boone Pickens announcing that he has sold all of his oil stocks because there is no end in sight to the oil downturn, I see no reason to remain overweight energy stocks. A neutral allocation to energy is 5% of the portfolio, which means one stock out of the 20-stock Value Portfolio, but we currently have two stocks (a double allocation) — GIFI and RES. I like both of these zero-debt companies for the long term, but GIFI is my favorite because it pays a higher dividend yield (4.3% vs. 1.6%) and has a low short-interest ratio of only 2.0% compared to RES’ extremely-high short interest ratio of 25.1%. Lastly, GIFI is trading at a discount to its book value ($9.05 stock price vs. $18.74 book value), whereas RES is trading at a premium ($12.78 stock price vs. $4.46 book value). Based on these data points, GIFI appears to be the safer value play and I want to tilt towards maximum safety during this energy downturn. Goodbye RPC (RES).

RPC Inc. is being sold from the Value Portfolio.