Seeking Alpha • Jul 19
National Presto Industries Is Prepared For A Successful Turnaround
The coronavirus pandemic has helped sales growth, and an increased backlog in the Defense segment during 2021 anticipates more sales increases in the medium term.
Profit margins have been hit hard by current macroeconomic events, but this is a temporary headwind for which the company is prepared.
Increased sales in the Defense segment will likely translate into better margins for the company's overall operations.
Debt is non-existent and the dividend policy is very flexible, with which the company has a lot of room to maneuver.
This represents a buy-and-hold dividend payer at a reasonable price.
Investment thesis
In January 2021, I wrote an article about National Presto Industries (NPK) where I concluded that the pandemic was going to be a turning point in relation to sales, which had been in continuous decline for a decade, as many families considered updating their home appliances due to mandatory lockdowns, making them buy more of their products. The company also made strong efforts to build the safety products segment, which should ultimately help the company stabilize sales, although the segment still represents a marginal part of the company and is generating losses. Still, the share price seemed too high as the recent increase in the P/S ratio was not being accompanied by increased margins while the cash payout ratio reached levels that made the special dividends paid in recent years unsustainable due to decreasing cash from operations in 2020.
Certainly, the coronavirus pandemic crisis helped the company as net sales increased by 14.3% in 2020, although the increase in 2021 was only 0.89% compared to 2020 and the first quarter of 2022 was somewhat disastrous. Nevertheless, the backlog of the defense segment has significantly increased during 2021, which anticipates a significant rise in sales in the next few years. Despite this good news that suggests that the company is recovering some of the ground lost in recent years, profit margins have been seriously affected by current macroeconomic events: supply chain issues, rising raw material, energy, and transport costs, and labor shortages. This has caused a sharp drop in the share price of ~25% since I wrote the last article, but a very flexible dividend policy along with non-existent debt put the company in a very advantageous position to survive these headwinds. Furthermore, the Defense segment, which is poised to grow significantly, traditionally enjoyed much wider margins than the company's overall operations, so margins should improve in the short term.
For this reason, I believe that the current macroeconomic events, which I strongly believe are temporary, present an opportunity for investors interested in acquiring shares at a reasonable price, especially long-term dividend investors. In this sense, the price of shares now looks much more reasonable compared to January 2021, so it seems that it is a good time to consider adding this company to relatively conservative dividend portfolios.
A brief overview of the company
National Presto Industries is a designer, manufacturer, and distributor of small electrical appliances, weapon ammunition, cartridge cases, precision mechanical and electro-mechanical assemblies, detonators, booster pellets, release cartridges, lead azide, and other military energetic devices and materials, as well as innovative safety technology for organizations and individuals. The company was founded in 1905 and insiders own a whopping 28.26% of the company's shares, which means that the management actively participates as shareholders. Currently, the market cap stands at ~$470 million, making it a small-cap company.
National Presto Industries products (Gopresto.com/product)
The company's operations are divided into three main segments: the Housewares/Small Appliance segment, which provided 33% of consolidated sales in 2021, the Defense segment, which provided 66% of sales in 2021, and the Safety segment, whose sales were marginal in 2021 at 0.1% as the company is still building it through two startup companies: Rusoh, Inc., which manufactures fire extinguishers, and OneEvent Technologies, Inc., which designs systems for early warnings to avoid significant losses.
Data by YCharts
Currently, shares are trading at $66.11, which represents a 24.39% decline since the last article I wrote and a 52.55% decline from all-time highs of $139.35 on August 21, 2018. This price has broken the psychological barrier created after the coronavirus pandemic crash back in 2020, so I think it is very important to consider the possibility of acquiring shares for the long term at this point, especially considering the company usually pays very juicy special dividends.
Net sales keep growing as the backlog increased significantly
Net sales have experienced a continuous decline over the last decade, partly as a result of an overly generous distribution of dividends that limited a more active policy of mergers and acquisitions and expansions. Luckily for the company, the coronavirus pandemic crisis represented a turning point as net sales increased by 14.3% year over year in 2020 due to increased demand from people updating their homes and kitchens during mandatory lockdowns.
Net sales (10-K filings)
In 2021, the increase was marginal at 0.89%, although this meant that the increase in sales experienced in 2020 managed to be sustained during 2021. The problem came during the first quarter of 2022, when the company reported a net sales decline of 25.02% compared to the same quarter of 2021, which suggested the loss of all the ground gained during the pandemic, on top of the current issue of tighter margins.
The backlog of the defense segment increased by 43.9% in 2021 to $460.8 million, and these are expected to be translated into sales in an 18 to 36-month period. This increase is much higher than the increase of 3.17% year over year during 2020 for the segment. Net sales in the Housewares/Small Appliance segment declined by 1.5% in 2021 after an increase of 16.62% in 2020, but it was offset by an increase of 2% year over year in the Defense segment.
In this sense, the decline in the share price experienced in the last year has caused the PS ratio to plummet as sales are showing serious difficulties to be increased in a sustainable way. The PS ratio currently stands at 1.392, which means the company generates $0.71 in sales for each dollar held in shares, annually.
Data by YCharts
In this sense, we now have two simultaneous headwinds for National Presto: decreasing net sales in the short term, and tighter profit margins, which means that these limited sales are not being translated into cash from operations as easily as in the past due to increased cost of goods sold.
Margins are temporarily depressed and it is not known until when, but we have some clues
The company has historically enjoyed very healthy profit margins, but the coronavirus pandemic and the subsequent rise in the cost of raw materials, transportation, and energy, as well as supply chain issues and labor shortages experienced around the world, have taken a toll on the company's ability to convert sales into actual cash. And now, the war between Russia and Ukraine is further complicating the threads that build trade relations around the globe.
Data by YCharts
Furthermore, the fact that margins for the first quarter of 2022 were lower than the trailing twelve months' suggests that these difficulties are still getting worse as of recently. Continuing in this line, gross profit margins of 15.98% during the first quarter of 2022 are slightly lower than the trailing twelve months' gross profit margins of 16.62%, and EBITDA margins of 6.25% during the quarter are also slightly lower than EBITDA margins of 7.69% during the last twelve months.
Still, we should keep in mind that such a drop in margins is relatively justified given that the world is currently facing high rates of inflation, and many consumer-focused companies like National Presto haven't had enough time to pass on the increase in costs to customers as a result of persistent inflation. For this reason, I believe that once inflation eases, the discrepancy between the final price of the company's products and the cost of producing them will widen again.
Furthermore, and taking 2021 as a reference, the Defense segment returned gross profit margins of 25.55%, much higher than the 8.60% reported in the Housewares / Small Appliance segment. Therefore, the increase in the backlog in the Defense segment during 2021 could translate into significant improvements in the margins of the company's operations as a whole in the medium term.
The company remains debt-free
One of the company's strongest points is that it enjoys a negative net debt thanks to the non-existence of debt. Despite all the setbacks that are currently hitting the company's operations, the risk of bankruptcy or serious problems is greatly reduced thanks to the fact that it does not have to face the payment of interest on any debt.
Data by YCharts
In addition, the company has over $80 million of cash on hand, so it still has reserves to continue facing headwinds while investing in growth initiatives. It is very difficult today to find such established companies with negative net debt, and this maximizes the possibilities of expansion of any company while minimizing its risks in difficult times like the present.
The dividend policy is very flexible
It is very important to understand the company's dividend policy, which is strongly influenced by the high exposure of the management to the stock, before investing if we intend to have a dividend stream. The company usually pays a fixed dividend of $1 per year plus a special dividend which is variable depending on the results of the company's annual operations.
Year 2014 2015 2016 2017 2018 2019 2020 2021 2022
Total dividend (fixed + special) $5.05 $4.05 $5.05 $5.50 $6 $6 $6 $6.25 $4.50
In February 2022, the management announced a special dividend of $3.50 per share in addition to maintaining the regular dividend of $1. This represents a significant reduction compared to recent years, but a necessary move due to the high cash payout ratio experienced during 2019, 2020, and 2021.
Year 2014 2015 2016 2017 2018 2019 2020 2021
Cash from operations (in $ millions) $73.21 $46.28 $44.56 $52.96 $39.94 $9.58 $40.97 $34.69
Dividends paid (in $ millions) $34.95 $28.11 $35.16 $38.41 $41.99 $42.09 $42.17 $44.08
Cash payout ratio 47.74% 60.75% 78.90% 72.52% 105.13% 439.18% 102.93% 127.08%
