NPK - National Presto Industries: Not There Yet

2023-08-21 05:01:09 ET

Summary

• National Presto Industries is a small conglomerate with a diversified business model.
• The company's sales and profits have shown signs of improvement, particularly in its Defense segment.
• Financial performance in the second quarter was mixed, but if the company stabilizes, it could see increased net profits and cash flow.

One of my favorite companies to analyze and talk about is National Presto Industries ( NPK ). In addition to being one of the first five stocks that I ever purchased many years ago now, the firm also is interesting to me because it is a living contradiction. Normally, conglomerates are viewed as massive enterprises that, having achieved their full or close to full market potential in the space in which they operate, expand into other opportunities to diversify their business and to capture growth elsewhere. But there are some conglomerates that defy this definition. These are companies that are fairly small in the grand scheme of things but yet still have a diversified business model. National Presto Industries is one such example. In the recent past, I have been rather cautious about the company. I remain that way today. However, I am starting to see evidence of the firm improving its overall operations. And if that trend continues, it may very well warrant an upgrade.

The picture is improving

It is incredibly important for investors to continually re-evaluate the companies that they own or are keeping an eye on. A change in fundamental condition can go a long way toward helping you achieve your financial objectives, or toward resulting in you coming up short. Prior to an article that I published in November 2022 that featured National Presto Industries as the topic, I was rather bullish about the company. But a strong upside that exceeded the broader market experience from the time I had written about it previously in February of that year until November, combined with a weakening of sales and profits, led me to downgrade the company to a 'hold'.

At that time, I told myself that I needed to keep watching for when the picture really starts to change. Nothing beats buying into a company, seeing its share price go up, selling, waiting for it to go down, and repeating the process all over again. Fast-forward to today, and it's clear that 2022 was a wash for the business. Relative to 2021, sales for the company were down 9.6%, while net profits dropped 19.3%. But this is a company that has been around for a long time, and I had no doubt that the picture would eventually show signs of improvement.

Today, those signs are becoming quite clear. Take, for instance, how the company performed during the first half of the 2023 fiscal year . During that time, sales for the company came in at $159.4 million. That represents an increase of 15.6% over the $137.9 million the company reported one year earlier. Interestingly, this sales increase came even as revenue associated with the Housewares/Small Appliances segment of the firm dropped 11.4% from $45.1 million to roughly $40 million. This decline, according to management, was largely due to a drop in the number of units that the business shipped, with decreased pricing and changes in product mix accounting for some of the decline as well. Unfortunately, management is not as detailed in their descriptions of matters as I would like. But more likely than not, this drop in revenue can be chalked up to weaker demand because of economic conditions. The drop in prices also seems to support that notion. If demand were high and the issue related to supply chains instead, you wouldn't see prices decline simultaneously.

The overwhelming majority of the growth for the company, then, came from its Defense segment. Revenue there spiked 28.2% from $92.5 million to $118.6 million. This increase was the result of higher shipments coming from the company's backlog. Given broader economic concerns, I think it is perfectly appropriate to ask whether the backlog is shrinking. After all, if the backlog is dropping as revenue surges, the company is just frontloading sales, and it might come back to bite them if the pain persists for too long. Fortunately, this does not seem to be the case. As of the end of the most recent quarter, backlog for the Defense segment totaled $533.5 million. This is up from the $505.1 million reported at the end of 2022. And it is up a whopping 26.2% compared to the $422.7 million the company reported in the second quarter of 2022.

This is great to see. On top of this, the increase in sales for the company has led to higher profits. Net income jumped from $9.6 million in the first half of 2022 to $14.4 million the same time this year. Operating cash flow fared even better, going from negative $2.1 million to positive $33 million. If we adjust for changes in working capital, we would have gotten an increase from $11.9 million to $18.7 million. And finally, EBITDA for the company grew from $12.4 million to $17.9 million.

This does not mean we are entirely out of the woods yet. If you look at the chart above, you will see that financial performance in the second quarter alone was somewhat mixed. Yes, revenue increased year over year. But the increase there was only 2.3%. This change came from the fact that defense spending increased a more modest 14.5% when restricting results to only the second quarter. At the same time, the Housewares/Small Appliances segment reported a 23.8% plunge in revenue. This almost certainly will continue to weigh on the company until management can find some way to improve matters.

With that note of caution recognized, I do think it is important for us to talk about what kind of upside might exist for shareholders from here. If we assume that the pain points of the company can eventually stabilize and that the first half of 2023 relative to the same time last year is truly indicative of how the company will perform for the second half of the year, we would expect the business to report net profits for the year of $31.1 million. Adjusted operating cash flow would be $44.8 million, while EBITDA would come in at $43.7 million.

In the chart above, you can see how this impacts the valuation of the company. That same chart also factors in pricing using data from 2022. Clearly, on a forward basis, National Presto Industries is more attractive than if we were to use data from last year. In fact, it is getting to the point of being almost attractive enough to consider an upgrade for the company. This argument is further bolstered by the fact that the firm has no debt on its books and that it enjoys cash and cash equivalents of $99.7 million. For a business with a market capitalization of only $546.6 million, that is a tremendous amount of financial flexibility.

Takeaway

In most articles like this, I really like to compare the company that I am focused on to similar firms. But because of the significant differences in how the company is structured compared to other firms out there, I don't believe that a comparison would add any real value. It might just complicate matters. What I will say is that, if the weakness seen in the second quarter alone is temporary and if the financial performance for the first half of the year as a whole is reflective of the firm's overall health moving forward, then the stock is getting pretty close to an upgrade. But between that uncertainty and how pricey shares are relative to the results seen in 2022, I am currently keeping it rated a 'hold'.

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