Description

National Presto Industries, Inc.(NPK), founded in 1905, manufactures and distributes small electrical appliances and housewares. NPK’s products are non-cyclical, diversified, and inexpensive. For the year ended December 31, 1999, Wal-Mart accounted for 46% and Target accounted for 12% of net sales. Wal-Mart Stores accounted for 44% and 43% of net sales for the years ended December 31, 1998 and 1997. As shown, a majority of the NPK’s sales are distributed through channels of the most highly regarded and respected titans of the retail world.

Due to the company’s long proven operating history and extremely cheap fundamentals, this stock appears to be an overwhelming buy. Summarizing some of the key fundamentals:

P/E (TTM): 10.71
Shareholders Equity: $34.80 (w/ no goodwill)
Dividend per Share: $2.00 (Yield=6.67%)
Debt: NONE
Operating Profit Margin: 14.9%

The most compelling part about this stock is the substantial amount of cash and equivalents on the balance sheet. As of September 30, 2000, the company had $198.55 million ($28.65/share) in cash and marketable securities. The cash level has remained relatively steady since 1995 when the cash position was about $204.0 million ($27.75/share due to a slightly higher float). Once again, the company has no debt therefore you get the entire operating business for $1.25 per share. Considering that the company produced $16.66 per share in sales and earned $2.79 per share in 2000, this stock appears to be unreasonably undervalued. Additionally, total current assets equal $255 million ($36.81/share) and the current asset ratio is 6.69. Quite frankly, NPK has one of the most conservative balance sheets in the universe of publicly traded companies.

The management has been under fire in recent years for not optimizing the return on the cash via acquisitions and mergers or paying out a dividend. The management’s response was that the company has always practiced financial conservatism in their long history. Melvin Cohen, Chairman of NPK, states that the stock market in recent years has been wildly inflated and quotes Warren Buffett, “a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.” I personally applaud Mr. Cohen for having the discipline and restraint for not getting caught up in the buying frenzy that has occurred through much of the 1990’s. Furthermore, they have been using some cash to buy back their own stock. In 1999, they repurchased 155,000 shares and were authorized to repurchase 595,000 more. Their current float is only 4.9 million, therefore the buyback represents a meaningful portion of the total amount of shares. The annual report for 2000 has not been issued at this time, so I am unable report how much they have repurchased since the end of 1999.

NPK has paid dividends for 57 consecutive years and the last 48 years has been an uninterrupted chain in which the dividend payment has equaled or surpassed the previous year. You would be hard pressed to find a company that has been successful in doing this for that long.

As far as competition is concerned, NPK has many rivals, but none are as well positioned. Salton and Sunbeam are the two formidable competitors that come to mind. Salton is a decent company, however they pay no dividend, carry an extremely high debt level and have low cash reserves. Sunbeam is teetering on bankruptcy and has been de-listed and is trading at $.07 per share.

Ironically, Benjamin Graham featured NPK in the fourth revised edition of “The Intelligent Investor”; the seminal value investors book. The book was published in 1973 and the market climate then was much the same as it has been in recent years. Gross overvaluations, speculative mindsets, and the impending market crash of 1973-74. In his analysis, he compares National Presto in 1968 to that of a hot conglomerate stock at the time, National General. Take National General and replace it with any technology name in 1998 and the point remains the same. The market was basically throwing billions of dollars at over inflated “hot” companies and hanging the boring (however good) business/hard asset plays out to dry. Due to a more rational value approach becoming popular again, by 1971, National General’s stock price had fell 85%, while National Presto’s was up 60%. It sounds hauntingly familiar to the present day market climate.

Catalyst

The major catalyst to this stock is the fact that they have so much cash and a successful, highly profitable product line. The market will eventually rationally value the company’s stock. If not, it would be a very attractive takeover target for a company that has a few products in this space, such as GE, Emerson Electric or Black and Decker. Or perhaps a more consumer-cyclical company (i.e. Maytag, Whirlpool, Electrolux) that wants to diversify its product line with a non-cyclical product line. NPK’s market cap is only $208.1 million (with $198.5 million of that in cash) which is not that much money to a company such as those listed above. It appears as though there is not much downside risk left in the stock, it is trading close to its multi-year low and near its cash value, and it pays a healthy dividend of $2.00/share(6.67% yield) per year.