NPK -- First Look

Current Price: $51
Market Value: $350M
Enterprise Value: $210M
Investment Type: Classic Value

NPK (National Presto) is a designer of small electric appliances and housewares, produces armaments for the U.S. defense department, and absorbent products. Yes, this company makes toasters, bullets, and diapers.

While operating income from the defense segment now accounts for almost 2/3 of total, NPK has been an innovator in the small appliances category for almost 100 years (a very interesting history can be found here).

The last couple of years have been eventful for NPK, to say the least. Most importantly, the company defeated the SEC in appeals court reversing a decision forcing NPK to be classified as an investment company due to NPK’s large cash hoard. Being classified as an investment company means more government oversight and reporting costs. Keep in mind that the original SEC action in 2002 was not due to accusation of destruction of shareholder value or executive wrong doing, rather due to SEC’s jihad on public companies prompted by the still fresh memory of the Enron and Worldcom debacles.

NPK hired and than promptly fired its new auditors 12 months later. According to this press release from the company, it hired one firm to perform the audit and another to perform the tax work. It is common practice to have the same firm do the audit and the tax work so NPK asked for bids and the firm originally hired to do the tax won.

On top of all that, the company’s CFO resigned “to pursue an opportunity as a financial advisor.” While I have no evidence to the contrary, I have a hard time believing someone would willingly resign a high paying executive position to be a cold calling stock broker.

Despite all the “noise,” NPK had an outstanding operating year. Revenues grew 38% (on top of 65% growth in the previous year) and operating income great 50% (after growing 83% the year before). The company ended the 2007 fiscal year with $142M in cash & securities and no long term debt after paying $4.25 per share dividend on 3/2008 and $3.80 per share a year before.

In the posts to follow I will discuss the bullish and bearish aspects of NPK.

* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.