|Shares Out. (in M):||17||P/E||0.0x||8.0x|
|Market Cap (in $M):||150||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||50||EBIT||0||0|
|TEV (in $M):||200||TEV/EBIT||0.0x||0.0x|
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We believe NN Corp. (Ticker: NNBR - $8.75) represents a compelling long opportunity with 60%+ upside in the coming 12 months? We see limited downside to intrinsic value.
We concede – this company might be considered a bit boring:
However, even though NN Corp. is not terribly exciting, there are a number of things to like about the company and the investment opportunity:
What does NN Corp Manufacture?
Capitalization and Valuation
|YE 2012 Cap.||YE 2013 Cap.|
|FD Shares Out.||17.1||17.1|
|Cash||19.0||39.0||Assumes $20mm in 2013 FCF (guidance $15-$20mm)|
|2011||2012||2013 Est.||2014 Est.||Notes|
|EPS||$1.02||$0.80||$1.10||$1.25||We use a fully taxed EPS - using a 33% Tax Rate|
|Multiple||4.7x||4.2x||3.5x||2014 EBITDA multiple calculated using YE 2013 Capitalization|
|FCF to Equity||23.0||20.0||24.4|
We think fair value in one year is $14 per share – a 60% premium to today’s share price. We base this on the following assumptions:
Ok – It’s Cheap – But What Makes the Stock Work?
We think the most important catalyst for NNBR stock is the end of destocking by the company’s largest customer. SKF AB in Sweden accounts for 34% of sales – this is a long term and stable relationship. NN’s products are a critical component to what SKF manufactures – there is not enough bearing capacity in the world for SKF to replace NN with another supplier. The problem is that SKF has been aggressively destocking their inventories since the beginning of 2012. That means that with auto sales down 8% to 10% in Europe in 2012 NN saw more than a 20% decline in their sales to SKF. So, while the rest of NN is performing pretty well this destocking has resulted in meaningfully lower overall revenues.
Now, the interesting thing about destocking is it can’t mathematically go on forever. Destocking means that a company’s inventory purchases are lower than its production – thus, if they continue this too long they’ll run out of inventories with which to build their products. The question is – how much longer will SKF destock? Our contention is they are done or close to done – and, we’ll see a tailwind to European sales because of this. Why do we think this is the case:
To summarize the SKF situation – we see an end to the destocking which has been so painful for NN. And, in general SKF management is pretty positive about the remainder of 2013.
However, NNBR management decided to be conservative and guide based on 2013 being flat to 2012 at $370mm in revenues. And they went on to say, “…our guidance assumes the European recessionary levels will continue and no improvement in the destocking for all of the upcoming year. “
In other words management decided to guide 2013 assuming continued destocking even when it is apparently coming to an end (per SKF commentary). We think NNBR management has been exceedingly cautious and they are setting up to beat guidance in 2013. They even conceded this to some extent, “We are hopeful that these assumptions prove to be conservative. And, in fact our first quarter 2013 results are exceeding our forecast for revenues thus far” (4Q Call).
So, that begs the question of how much 2013 could be boosted if Europe does not destock? Looking at the geographical segments we can see that Europe was down about $54mm 2012 vs. 2011. We think at least $50mm of this was in bearings. Management has said the destocking has a 2x factor on lowered auto sales – suggesting about 50% of the $50mm was due to lower auto sales in Europe and the other 50% was due to destocking. This means that if Europe does not destock NNBR could see upwards of $25mm in additional revenues in 2013 over 2012. This would come in at about 30% contribution margins so would represent roughly $7.5mm in additional EBITDA.
Will we see all of this in 2013? It is hard to know but we think the end of destocking provides meaningful upside to NNBR’s 2013 numbers. If sales to Europe improve then guidance has to come up. As estimates come up, sentiment will improve and multiples will as well – all of this will happen in the face of nice FCF and declining debt. This will, “make the stock work”.
Beyond the ‘end-of-destocking’ catalyst – there are a couple of things we think may also help the stock:
NNBR is a pretty good company in a decent industry – but at present is an unloved story. The company has actually performed well even in the face of a very difficult European situation. This quarter or next – we will see the end to destocking in Europe – setting up for a better 2013 than currently perceived (and guided to). While we wait – we have a cheap stock, with lots of FCF, which is deleveraging nicely.
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