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Alan Brochstein
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Alan Brochstein, CFA has worked in the securities industry since 1986. He founded AB Analytical Services (www.ABanalytical.com) in 2007 in order to provide independent research and consulting to registered investment advisors. In addition to advising several different hedge funds and investment... More
My company:
Invest By Model, provided by AB Analytical Services
My blog:
MyOwnAnalyst
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  • Shhhh.... National Presto Reported Good Numbers
    This is a repost:  http://ab.typepad.com/my_own_analyst/2010/07/shhhh-national-presto-reported-good-numbers.html



    I am not so sure why they are so secretive, but NPK posted their Q2 EPS on their website and throughout the Wisconsin local media (but no national news release).  You can't even find this on Yahoo...
     
     
    No SEC filing yet, so this is all I have.
     
    Sales grew about 14%, but the bulk of it was defense, with Housewares slowing to 6%.  Recall that Housewares were very strong last quarter, while Defense was very weak (it's lumpy).  EPS grew about 12%, though it appears that used equipment sales in the diapers boosted the earnings. If I look at YTD growth in the segments, here is how it looks compared to 5.9% overall YTD growth:
     
    Absorbent: 5.6%
    Defense: 3.3%
    Houseware: 12.8%
     
    YTD EPS growth off of this 5.9% top-line is 16%.
     
    This sounds decent to me.  I was a bit alarmed at the clearly unsustainable Housewares growth reported last quarter and the not-so-clearly unsustainable weakness in defense, so it's good to see the normalization. 
     
    Compared to 2008, EPS are 78% higher, while sales are 19% higher. We have been looking for minimal margin expansion this year due to a reversion of freight and material costs, which were very weak in 2009. 
     
    It seems that NPK is capable of growing EPS this year slightly faster than sales.  In 2009, EPS were 9.13, and it seems reasonable to continue to expect EPS of about $10 in 2010.  This will require earning about $6 in H2 compared to $5.60 last year (just 7% growth).
     
    A wildcard on NPK is that if the tax-law on dividends is going to change, they could declare their extra dividend in December rather than March.  I am not sure if they would be able to do this or not, but they might even issue some debt to recapitalize and pay an even larger dividend (any tax guys know if this is even possible???).
     
    At 10PE, NPK stock looks to be a reasonable name for conservative growth.


    Disclosure: Long in Model Portfolio (Invest By Model's Conservative Growth/Balanced Model Portfolio)

    Disclosure: Long in Invest By Model's Conservative Growth/Balanced Model Portfolio
    Tags: NPK, Consumer Discretionary, Small Cap, Dividend Payers
    Jul 31 8:28 PM | Link | Comment!
  • TECUA: Soap Opera Over, Dirt Cheap!

    I have been building a position in the foundation I manage as well as in the Top 20 Model Portfolio in Tecumseh Products Class A shares.  I had only heard of this company and had always looked at it as a value trap without really knowing the story.  I have invested a lot of time in the past week reading SEC filings and talking to the I.R. contact at the company (who is very helpful - Theresa Hess at (734)-585-9507).

    I will probably share more detail in the coming weeks - they won't be reporting until early March, so I have time I believe.  Still, I wanted to share a brief outline of my thought process.  Before I do that, just a little background.  You can learn more about the company by visiting their website, but they make compressors for refrigerators, freezers and other HVAC equipment.  Over 80% of their sales are overseas - they operate plants in Brazil, France, the U.S. and India.  The company has two classes of stock, the "A" shares (no voting rights) and the "B" shares (TECUB), which have all the voting rights.  The company has about 18mm shares total - 13mm A and 5mm B.  The Herrick Foundation owns about 1/3 of the B shares and 15% or so of the entire company.  There was an ugly proxy fight last year that resulted in the Herricks regaining control of the Board and two key employees (the former CEO and CFO) leaving.  Just recently, the senior management team has been announced, with the former COO becoming CEO and two key hires (a new CFO and a new COO essentially, though not with that title).  The guys that left were doing the right thing, and the new guys will too.  The stock trades at tangible book value DIVIDED BY 2, though it has net cash on the book.  They did burn cash in 2009, but they expect to generate operating cashflow in 2010. 

    Here is my thought process:
     

    • No one knows or cares about this company - no analyst coverage
    • No one really cares about the industry from a macro sense - it's dull and mature
    • It is very cheap to tangible book value (PPE represents over 1/2)
    • The soap opera is over
    • New Management seems highly capable
    • The Herricks have expressed an interest in selling
    • The business is very depressed after collapsing end markets and inventory adjustments
    • If the company can breakeven on cash generation, it is a double to TBV
    • If the company can actually grow again, it is a triple to 1.5X BV
    • The company has earnings power of at least $1, but probably much higher
    • Most people I know are looking for industrials, especially with 80% OUS sales
    • No issues with inventory or receivables
    • The business seems to have bottomed
    I probably could say more, but I think it frames the situation.  The stock would seemingly have little downside here given the valuation (assuming that cash burn stops, which makes sense) and the lack of significant debt.  The upside seems phenomenal - 2X to 3X depending upon how well management does and how stable or strong the end markets become. 



    Disclosure: Long TECUA
    Tags: TECUA, tecumseh
    Jan 13 12:57 PM | Link | 5 Comments
  • Giant Hopes
    I was only peripherally aware of TWI until yesterday.  Last night, the company announced preliminary guidance for 2010 as well as the closing of its highly dilutive convertible deal.  While the guidance seemed pretty good to me, the two analysts had some rather aggressive assumptions previously.  I took a position in AH and did some work on the name.  Unfortunately, I don't think this one is a keeper despite it being very cheap (trades at TBV), but I may hang onto it.

    TWI is a leader in off-road tires (mining equipment, agriculture).  They are focused, appear to have some technology and have made some major investments that are now behind them.  They want to be a consolidator of the industry, but their balance sheet (before the convert) was impeding their chances.  The end-user demand has declined this year, but inventory destocking has been even more severe.  CEO Taylor's view of 2010 is that production should more closely match what will prove to be stable demand.

    The company issued a forecast for sales to grow in 2010.  EBITDA is forecast to be $75mm roughly, which will be an all-time high.  CapEx will decline sharply, so this should be a free cash generator to the extreme (10% of the market cap assuming the EBITDA forecast is correct).

    The company has $193mm of 8% notes due in two years.  Prior to the convert (172mm of a 5.625% coupon, 7yr maturity, 10.75 conversion price), the company had $45mm (and now $210mm roughly).  The company is negotiating with Goodyear and is pursuing other acquisitions and will use the cash (along with the assumption of debt and the possible issuance of stock) to fund a deal.  Until then, the convert eats up $10mm a year in interest expense.  Presumably, the company could take out the existing debt in short-order if it isn't able to agree to terms.  Also, CEO Taylor is considering some sort of securitized financing of his tooling equipment as well.

    I find the timing interesting, as the stock has been beaten up by the rather large convertible issuance and has reacted poorly to the guidance (despite it actually being very solid if achieved).  There is considerable optionality here, as the company could execute a very accretive transaction.  The theme is solid - look at the stocks of the types of companies associated with big tires (BUCY, JOYG, DE, CAT).  Anyone have an opinion?

    Disclosure: Long
    Tags: TWI
    Dec 22 1:11 PM | Link | 3 Comments
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