Commentary

Jun
11
2010

National Presto: The Absorbents Business

Two weeks ago we introduced readers to National Presto (NPK), a business with three well diversified segments and a very healthy dividend yield in the range of 8%. Last week we dug into the housewares segment, and this week, we’re going to explore the absorbents business.

Absorbents

The absorbents business is a small but growing segment for National Presto. It primarily produces private-label adult incontinence products. Revenue for the absorbents segment is about half that of the housewares segment, and until recently, it’s been at best a break-even business. However, in 2009 the segment generated a healthy profit, and that trend has continued into the first quarter. By comparing the absorbents segment of NPK to the diaper segments of P&G and Kimberly-Clark, we might be able to get a better sense for what to expect in the future. First, the financial statements for the NPK absorbents segment:

The Proctor and Gamble Baby Care segment:

And the Kimberly Clark Personal Care segment:

The first thing you might notice is that NPK’s business is that it’s a tiny fraction of the Kimbery-Clark (0.9%) or P&G (0.5%) business. NPK would be a rounding error or a lost shipment for them. The second thing you might notice is that NPK has had trouble breaking even until recently. Part of the reason for the difficulty might be that they’ve accelerated depreciation. But more importantly, they’ve struggled to achieve economies of scale. Now the segment is profitable and it’s reasonable to expect that to continue. The board has authorized a $30mm expansion of this business, of which we estimate $10mm has been spent ($3mm in the first quarter and a purchase commitment for $7mm).

It seems like the historical RoIC has been in the range of 15% for the big players, both in terms of earnings and FCF. NPK won’t be able to achieve the premium pricing power of Pampers or Huggies, but they also don’t have the advertising expenditure, and because of accelerated depreciation, returns should appear higher if the business doesn’t grow. At the moment, I think the LTM RoA of 13.5% represents a somewhat stable baseline going forward. If NPK can annualize first quarter sales, this estimate will appear overly conservative in coming quarters.

Using the same valuation techniques as last week, we can estimate a downside limit in the range of 6.67x LTM net income, or $37mm. But management has planed a CapEx project of $30mm, meaning they plan on growing this business unlike the housewares segment. Using last week’s Gordon Growth model, (50% reinvestment rate, 13.5% RoA, 6.75% growth, 15% discount rate), we get a present valuation of $59mm after the additional $27mm CapEx comes online. This gives us the following valuation range:

At the time of this writing, Kerrisdale Capital and it’s affiliates have no position in NPK.

Update: Part 4

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