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TMFPostOfTheDay (< 20)

National Presto Endures



May 01, 2014 – Comments (1) | RELATED TICKERS: NPK , BRK-A

Board: Berkshire Hathaway

Author: TMFRichDad

I've owned Presto since early 2011. If anyone is considering an investment in the company, there are a few things I think they need to know.

First is, that the dividend is paid once a year in the spring. And for the past 6 years or so, a portion of that "special" dividend is in a sense really a partial return of capital as it is coming out of the municipal bond holdings that in 2011 totaled over $100 million. That balance today is about $36.4 million. At some point, probably soon, Mary Jo (CEO) will stop shrinking that balance and the "special" portion of the dividend will be smaller than it has been in the recent past.

There is a fairly regular pattern of stock price movement that is noteworthy and it's fairly evident when looking at a multi-year chart. The tendency is for the stock to reach it's peak right around the special dividend payout date and to reach it's low point in the summer months. My theory as to why this is happening is that it is due to supply-demand imbalances for the shares created by various dividend capture CEF and lay investors too. I can't prove it but the stock is a good candidate for someone attempting to practice this questionable, yet somewhat popular, {cough} "investment" strategy.

The rest of what someone should know is best summarized in this post that I wrote back in 2011:

Founded in 1905, Presto has an extremely interesting past and the company gives its overview of it here:

That is pretty much typical boiler plate stuff and just what you’d expect when a company talks about itself.

Did you know that Presto is mentioned multiple times in Ben Graham’s Intelligent Investor?

I’ve always found it fascinating to review what Ben thought, way back when, about a company I was researching today. The takeaway from Ben’s thoughts on Presto may be interpreted as that Mr. Market has a history of miss-pricing the shares from time to time.

None of that is particularly helpful when trying to decide on the investment merits of Presto stock today, however, except that the company has survived two world wars, the great depression and the recent financial crisis which is no small feat. Presto has staying power. But the thing that is helpful in making a decision on a company is to learn how that company handles adversity. Any company can produce impressive results when times are good but it’s when times are bad that are most telling.

You may have noticed that Presto owns some $100 million in investments, primarily municipal bonds, and has carried these investments on its balance sheet for many years. Back in 1999 and 2002 the SEC took exception to this large investment position and sought to classify Presto as an investment company because the $100 million exceeded 40% of the company’s asset base. Presto fought the SEC in court and, in 2007, the company was eventually vindicated.

The nine year legal battle with the SEC is summarized by Mary Cohen, CEO, in her letter to shareholders found in this annual report:

TMF weighed in on the issue in 2004 in a “point-counterpoint” dual article format linked to below. The first of which, authored by Bill Mann, is particularly interesting (if you read no other link in this post, read this one) as it outlines the situation in an easy to understand and interesting fashion in a way only Bill can do:

Particularly noteworthy are these wise words:

Which to my mind is what is so strange about the rabid focus of the SEC on this particular company. Yes, a securities lawyer I spoke with suggests that under some interpretations of the 40 Act, Presto could possibly be designated an investment company. The SEC first launched its investigation into National Presto in 1999, and filed suit in 2002, which remains unresolved. If they were seeking some mea culpas and rapid acquiescence from a terrified target, they clearly hadn't been paying attention to the iconoclasm of the Cohens. National Presto has refused to admit any wrongdoing and states emphatically that its level of conservatism is in no small part due to watching the experiences of its peers, which have a nearly unblemished string of destroyed capital from acquisitions. National Presto could have gone out and made some rash acquisitions to make the SEC go away, but they still stuck to their guns.

One question remains unanswered -- why, in the late 1990s did the SEC pick on National Presto? The period that we're talking about may go down as the golden age of big-dollar frauds. Adelphia, WorldCom, Enron, Tyco (NYSE: TYC ) , the bogus IPOs, Henry Blodget, Cendant (NYSE: CD ) , Conseco, and a whole host of others robbed investors blind completely undetected by the Commission until maximum damage had been inflicted on shareholders. Meanwhile, the SEC focuses its full force and fury upon a $200 million Wisconsin pressure-cooker company for the crime of being too conservative? This makes no sense. In 2002, Michael Schroeder of The Wall Street Journal reported that the SEC had lost more than one-third of its staffers over the previous four years, because they were understaffed and overwhelmed.

One theory I hold is that the SEC thought that National Presto might prove an easy "victory" following this succession of highly public failures. In 1999, the New York Society of Securities Analysts (NYSSA) nearly inexplicably chose National Presto as its subject for a project on corporate governance. The NYSSA project was a disaster, with its analysts making recommendations that National Presto devote huge amounts of capital to advertising products that already had razor-thin margins. One analyst, John Tully, noted that National Presto would do much better by its investors if it invested substantially all of its liquid assets and working capital "in conservative ventures generating only 10% returns."

The Cohens' collective responses to this study were rightly contemptuous, stating that if they could find such an unidentified opportunity, they'd invest in it instantly. The helpful folks from NYSSA did not include a list of candidates, unfortunately. The SEC's interest in National Presto in the first place came close on the heels of a call from a Wall Street Journal reporter requesting comment on the as-of-yet unreleased NYSSA report. A full read of Melvin and MaryJo Cohen's responses to this report is a treat.
(A link to it is in the article).

National Presto cannot in any way be accused of candy coating the condition of its core home appliance business. If there were any question whatsoever that the company wasn't just seeing dead people, the blowup of Salton clinches it.

Finally, in the 2008 annual report, Mary had this to say:

Certainly the effects of the liquidity crisis that occurred late in the year demonstrated the wisdom of your Company’s conservative fiscal policy with which the SEC had taken issue. While others scrambled for funds your Company’s strong cash position enabled it to finance all of its operations from internal resources.

So, what’s it all mean?

For me, I find Presto particularly attractive as an investment because I have utmost confidence that any money retained by the company will be spent wisely or not spent at all. Excess cash will be distributed to shareholders in the form of a dividend making it particularly attractive for tax advantaged accounts. The adversity outlined above gives me confidence in Mary Cohen’s leadership and capital allocation abilities and the company’s emphasis on surviving first and profits second, no matter what, means that this investment is safer than many others. I find her honesty expressed in the annual letters refreshing.

I’m in.


ps: Still "in". 

1 Comments – Post Your Own

#1) On May 08, 2014 at 5:28 PM, TransverseSlice (< 20) wrote:


 `a portion of that "special" dividend is in a sense really a partial return of capital as it is coming out of the municipal bond holdings'

 Are you sure about this? Quoting from the most recent letter to shareholders

`Late in the year, the Board of Directors approved dividend action for the 70th consecutive year. A resolution subsequently adopted, authorized disbursement of a single lump sum in March 2014, consisting of a regular dividend of $1.00 per share plus an extra of $4.05 per share. As in past years, the entire dividend was derived from operating earnings.'

My rough calculations looking at the income statments from the past two years seem to support that the dividend was covered by operations. I could be wrong though, since acquisitions accounting may be clouding the issue. Sure, many of the municipal bond holdings have been liquidated but I don't think they are being used to fund the dividend (acquisitions + heavy investment in the Absorbent products segment).

I am a big fan of NPK for some of the reasons you state and many others (although I would prefer not to `talk my book' in much detail on a public discussion board). 

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