NPK -- “Da Bulls” Part I

The bull case for National Presto (NPK) is simply that at current levels the downside risk is very small.

To calculate the downside price target I did a sum of parts valuation using VERY conservative assumptions. Under this valuation methodology, NPK is worth only the value of the small apps business plus the liquidation value of the defense and absorbents business plus the cash on the balance sheet.

I assumed 1.6% revenue growth rate and an annual 50 bps decline in EBITDA margins to estimate the value of the small apps business which means that cash flow declines every year until the business is break even and assumed to be worthless. The net present value of estimated cash flows from the small apps business using a 7% discount rate is $30 per share.

In calculating the value of the defense business I assume the worst case scenario under which NPK delivers on its $250 million stated backlog for 2008 with similar margins as in 2007 which would produce $22 million in after tax free cash flow. At the end of 2008 the business is assumed sold at ½ the dollars invested in CAPEX over the most recent 4 years. Under this worst case scenario the defense business is worth $5 per share.

For the absorbents business I simply assume that its dumped on someone else’s lap at ½ CAPEX over the last 4 years which produces a $2 per share business value.

The last two pieces are the working capital from the two liquidated businesses as well as the current cash on hand which combined is estimated to be worth $24 per share.

My detailed calculations can be viewed here.

The sum of parts valuation under these assumptions is $61 per share which is $5 or 8% below the current price of approximately $66 per share. A worst case scenario downside of 8% is substantially smaller than the potential upside under even modest positive assumptions which will be discussed in the next post.

* 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.