NPK -- “Da Bears”

As with all the stocks profiled on this blog the laundry list of problems with National Presto (NPK) is long and deep. NPK’s second largest business is facing both short and long term pressures, success of the company’s defense business is based on large government contracts that may not be renewed, the company’s management has invested both time and money into the diapers business with very poor results thus far, and the stock is highly illiquid.

National Presto’s appliance business has experienced 1.6% annual sales growth over the last 8 years with the company constantly stating that it cannot raise prices fast enough.

While the decision in 1999 to outsource manufacturing to China was certainly a positive it means that NPK will be negatively effected if the dollar continues to fall and/or inflation continues to stay high in China. These items have already taken their toll with EBITDA margin falling from a peak of 19.7% in 2005 to 18.7% in 2006 and 15.8% in 2007. With the company unable to raise prices fast enough its likely that operating margins in the appliance business will continue to contract.

There is very little visibility in the defense business. Management has not indicated what percentage of defense revenue comes from the Department of Defense (DoD) and what percentage from other sources (police force, etc.). The company has not provided any indication of whether they expect the Department of Defense (DoD) to expand the $1.3B contract after it is filled.

NPK’s fillings state that it expects to deliver $550M of the $1.3B contract (up from initial award of $300M) and based on my calculation the $550M will be mostly filled by the end of fiscal 2008. If this business is not replaced, company EBITDA will fall by approximately 50%.

There is not much to say about the absorbents business other than it’s a mess, no pun intended.

After combing through old SEC fillings, I calculate that since 2001 NPK has invested $36M in CAPEX for total EBITDA of $8M. The annual rate of return has been 3% and that is without including working capital in the equation. This is a very low margin, highly competitive business that is exposed to severe swings in commodity costs (wood pulp and energy) and NPK is never going to be a cost leader in this industry.

* 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.