Income Investors Should Weigh Trade-Offs At National Presto

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National Presto (NPK) is one of those investments that simply doesn’t appeal to everyone.

It has been a dividend payer for 75 consecutive years. Then again, it does only pay once a year. Although, its standard dividend rate is $1.00 per year, historically, it has paid a special cash dividend at the same time. The two dividends are typically declared simultaneously when the company reports full-year results in the latter half of February and paid in mid-March.

The special cash dividend amount varies year to year. It was as high as $7.25 per share in 2011 yet fell to $3.05 per share in 2015. For the past three years, it has held steady at $5.00 per share.

Source: Author-created from company data

As reflected, the payout ratio based on both dividend amounts and prior year earnings tends to be high. Many income investing advisors warn against high payout ratios as it implies future dividends may be at risk. Yet, National Presto is a debt-free company with a healthy balance of cash and marketable securities valued at $123.5 million. With just over 7 million shares outstanding, this means National Presto has over $17.50 in cash per share. For most, this buffer lessens the worry over high payout ratios.

When insider ownership is healthy, many investors are assured shareholder return will be a priority. At over 28%, insider ownership at National Presto is respectable. CEO Maryjo Cohen owns nearly 26% of the outstanding shares, either directly or indirectly.

Company Description

National Presto has been in business for more than a century. But, it wasn’t the same company through the years. Its focus shifted based on society’s needs. In the 2002 movie, Sweet Home Alabama, Josh Lucas’ character assures Reese Witherspoon’s character, “You CAN have roots and wings.” National Presto has proven it has both roots and wings.

In 1905, Northwestern Steel and Iron Works, National Presto’s predecessor, manufactured pressure canners for commercial use. When the USDA endorsed pressure canning as the only safe way to can low-acid foods in 1917, commercial canneries were forced to implement pressure canning equipment. Between commercial pressure canners and home pressure canners, the company grew to one of the largest in the world. A name change to National Pressure Cooker Company followed. In the late 1930s, the “Presto” brand was born after the company developed a saucepan-style cooker.

World War II rewrote the company’s history. National Presto, like many American manufacturers, temporarily discontinued production to support the country’s efforts in the war. It began producing artillery fuses, aerial bombs and rocket fuses. When the war ended, the company returned to its roots manufacturing products for home use.

As the U.S. recovered, National Presto’s product line grew. Yet another name change followed – to National Presto Industries. In 1969, the company listed on the NYSE.

In 2001, National Presto returned to its military affiliation when it acquired AMTEC Corporation, a manufacturer of ammunition, fuses, firing devices and other precision products for the U.S. Department of Defense. With the acquisition of more munitions manufacturers, the product line expanded to LAP (Load, Assemble and Pack) work, cartridge cases, and less than lethal ammunition such as smoke grenades, tear gas grenades, stun munitions, gas masks and others.

In 2001 and 2003, acquisitions led to National Presto’s foray into a third business segment, absorbent products. This segment focused on private-label adult incontinence products. In 2017, this business was sold.

In July 2019, National Presto announced its acquisition of OneEvent Technologies, a SaaS monitoring system provider. Unlike most monitoring systems, OneEvent Technologies focused on preemptively protecting property and life by predicting and alerting on potential risks and disasters rather than reacting to them. Using smart sensors, machine learning and predictive analytics, OneEvent’s cloud-based software, OnePrevent, monitors an environment for changes that could be signaling a problem.

National Presto now operates in three segments – the Housewares/Small Appliance segment, the Defense segment and the Safety segment. In the past year, National Presto’s business has benefited from the cooking at home trend and increased ammunition shipments.

Third Quarter Results

National Presto reported third quarter results on October 23rd. Revenue of $93.9 million is over 20% greater than revenue of $78 million in the 2019 third quarter. The revenue improvement stemmed from better performance in all three segments. The Housewares/Small Appliance segment improved 25.8% from $21.6 million in 2019 to $27.2 million. The Defense segment improved 18.2% from $56.4 million in 2019 to $66.7 million. The newest Safety segment improved 536% from $14 thousand in 2019 to $89 thousand.

The older segments generated operating profit while the newest segment operated at a loss. The Housewares/Small Appliance segment improved from an operating loss in 2019 to an operating profit of $2.4 million. The operating profit in the Defense segment declined 30% from $19.2 million in 2019 to $13.4 million. The operating loss in the Safety segment increased over 20% from $1.06 million in 2019 to $1.35 million.

Net income declined 26% from $16.4 million in 2019 to $12.1 million.

Two significant and extraneous third quarter 2019 events overshadowed what would otherwise have been strong comparative operating results from both of these segments. The first was a favorable $9.4 million negotiated termination of a commercial foreign military supply contract, while the second was a $2.3 million settlement of a lawsuit pertaining to the discontinued Absorbent Products segment.

Through the first three quarters, revenue of $246.7 million is 15.5% greater than revenue of $213.6 million in the 2019 third quarter. The revenue improvement stemmed from better performance in all three segments. The Housewares/Small Appliance segment improved 20.9% from $60.4 million in 2019 to $73 million. The Defense segment improved 13.3% from $153.1 million in 2019 to $173.5 million. The newest Safety segment improved 260% from $53 thousand in 2019 to $191 thousand.

Again, the older segments generated operating profit while the newest segment operated at a loss. The Housewares/Small Appliance segment improved from an operating loss in 2019 to an operating profit of $4.7 million. Unlike the third quarter, operating profit in the Defense segment improved 4.4% from $36.7 million in 2019 to $38.3 million. The operating loss in the Safety segment increased nearly 87% from $2.2 million in 2019 to $4 million.

Net income increased 8.3% from $30.5 million in 2019 to $33 million. Earnings on continuing operations increased over 14% from $4.11 per share through the first three quarters in 2019 to $4.69 per share.

Backlog in the Defense segment improved 4.2% from $310.4 million at the end of 2019 to $323.5 million on September 27, 2020. In 2017, the Army awarded National Presto a third five-year 40mm ammunition contract for 2017 through 2021. On May 22, National Presto was awarded $22.2 million on the fourth year of the contract. It was also awarded $22.2 million as an option award for M918 and M385A1 projectile assemblies.

A week later, National Presto received a $32.7 million follow-on subcontract for the Small Diameter Bomb program. In April 2018, the company initially announced the subcontract, its largest to date, for warhead production.

Holiday Seasonality

National Presto’s Defense segment typically generates the majority of total revenue. As is typically the case, in 2019, revenue in this segment at $209 million more than doubled revenue in the Housewares/Small Appliance segment at $99 million. The majority of revenue in the Defense segment is derived from U.S. government contracts. The exception to this ratio pattern typically occurs in the fourth quarter when the Housewares/Small Appliance segment benefits from holiday spending. In the 2019 fourth quarter, revenue in the Housewares/Small Appliance segment was $39 million while revenue in the Defense segment was $56 million.

National Presto traditionally introduces new products at the annual International Housewares Show held every March. However, due to the COVID-19 pandemic, the show was cancelled for 2020. The company had planned to introduce four products – the Stuffler™ stuffed waffle maker,

the Dorothy™ rapid cold brewer,

the Presto Precise™ digital pressure canner

and the Power Bento™ electric cooker.

Source

New product launches were delayed until first quarter reporting in late April. The company felt all four products would fit into the cooking at home trend. Still, the company planned major national advertising programs for the Stuffler and the Dorothy rapid cold brewer for the fall. It appears the company expects these two products to be more popular. Then again, perhaps the company estimated the digital pressure canner and Power Bento electric cooker needed less marketing support. Personally, I would expect the digital pressure canner and Power Bento to be more popular than the Stuffler and rapid cold brewer as both products offer more capabilities and flexibility. Currently, of the four new products, the digital pressure canner is out of stock on the company’s website.

Source

Investing Rationale

National Presto’s transparency does leave a bit to be desired. Presentations are not published. It does not hold quarterly earnings calls. Thus, it can be difficult to interpret the company’s business strategy and intentions. Its decisions are left open to interpretation.

The apprehension I have about the company’s planned marketing campaign in 2020 is not the first time I’ve questioned the company’s strategy. But, today’s apprehension pales in comparison to the disenchantment I felt about National Presto’s commitment to the Absorbent Products segment a few years ago. On the other hand, the company’s foray into the SaaS business model through OneEvent is encouraging and holds potential. Though, it is pertinent to recognize the segment is not yet expected to be profitable.

My investment club began watching National Presto in 2013. Because the club invests for the long term and because of the company’s lack of transparency, it’s been difficult for us to justify an investment. But, with the benefit of hindsight, we see share price appreciation in 2018 would have potentially meant an investment from 2013 could have doubled. Source

Furthermore, over the seven years we’ve missed out on $37.65 per share in ordinary and special dividend payments.

It is interesting to note, in the past few years, National Presto’s share price action has not consistently reacted to its ex-dividend date. In 2017 and 2018, it took less than 10 business days for the share price to recover and surpass the closing price prior to the ex-dividend date. In 2020, it took 31 business days. At the other extreme, the share price has still not recovered to the closing price on February 27th, 2019.

Source: Author-created

Like many situations in life, investors face trade-offs. National Presto is not shareholder-friendly relative to transparency. But, the scale does tip back toward the shareholder relative to dividend payments.

For most of 2020, National Presto’s share price has traded in the $80 to $90 range. Investors focused on building a stable income stream may find this range provides attractive opportunity.

Potential investors will want to keep February 26, 2021 in sight as it is, most likely, the next ex-dividend date.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in NPK over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.