|
Published: May 17, 2010
Investing in small
market capitalization stocks is a time-tested approach to
beating the stock market. For starters, it is easier for small
companies to grow the top line rapidly because new business can
have a significant impact on their smaller sales levels. They
can also be less bureaucratic, which keeps costs low and allows
more sales to fall to the
bottom line as profit. And finally, they tend to be less
followed by Wall Street analysts, which gives smaller investors
a better opportunity to find undervalued companies.
A current opportunity for value investors and income-seeking
individuals as well is Eau Claire, Wisc. based National
Presto Industries (NYSE: NPK). National Presto operates
three disparate business units that each have their own appeal.
The first is most familiar to consumers and consists of selling
housewares and small appliances. The products are used in
cooking and canning and include Control Master frying pans, deep
fryers for hamburgers, pizza ovens and even microwave bacon
cookers. To see the merchandise on display, simply head to
Wal-Mart (NYSE: WMT), as it accounted for 11% of last year's
total company sales.
The second segment couldn't be more
different. It sells military products to the U.S. Department of
Defense. The business stems from the 2001 acquisition of AMTEC
and brought merchandise for niche uses, such as training
ammunition and firing devices.
The third division is officially called the "absorbent products
segment" and sells private-label diapers. Just like National
Presto as a whole, the unit's target market is diverse --
healthcare products firm Medline accounted for 12% of last
year's sales in this segment.
In terms of impact on the company, defense accounted for 53% of
last year's total company sales of $478 million. Housewares
kicked in just over 31%, and diapers the rest. Defense is also
the most profitable and made up 60% of total operating income of
$91 million. Housewares contributed one third of profits and
diapers, which reported its first full year of real profits, the
rest.
National Presto's operating margins are substantial -- averaging
in the double digits and exceeding 19% of sales last year. Net
margins have hovered in the high single digits during the past
decade but jumped to 13.1% of sales last year as income taxes
temporarily fell.
In other words, despite the seemingly disparate businesses, they
are all decently profitable and don't require much capital to
maintain and expand. Of the $62.1 million National Presto
generated in operating
cash flow, it only used $3.3 million on capital
expenditures. Another big positive is that all three segments
are relatively recession resistant because they are less
dependent on the business cycle for sales to hold up.
If annual profit goals are met, management uses the excess cash
it generates for a generous dividend payment. The current stated
dividend yield is below 1%, but National Presto has paid an
extra dividend during the first quarter for at least the past
three years. Last year, total dividend payments were $5.55 a
share, and payments reached $8.15 a share this year. This equals
an impressive annual dividend yield of about 7.5%.
The actual dividend yield is missed by most investors because
most web-based financial resources only provide details on the
regular dividend payment. Additionally, only one Wall Street
analyst currently covers the stock, which means it is
underfollowed and thus very likely to go neglected by
institutional investors.
At a trailing P/E of less than 12, investors can gain exposure
to a highly profitable business with an above average dividend
payment at a compelling valuation.
-- Ryan Fuhrmann
Contributor
StreetAuthority |
