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Revisiting a losing pick

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May 03, 2008 – Comments (2) | RELATED TICKERS: NNBR

The tried and true "repeat a pitch for a blog entry." 

Returning to a crash site on this one.  I had picked this last year as an outperform. Shortly after picking it, they ran into real problems getting production on line at a new plant in China and a recent acquisition, Whirlaway, wasn’t performing well.  I also bought a little of the stock.  Long story short – lost both money and CAPS points.  If you’re interested in that saga, you can find it by expanding the pitch for the 6/12/07 pick on my closed picks page. 

NN, Inc. (NNBR) is a small $175 M market cap company that makes bearing components and precision metal and plastic parts.  They pay a dividend with a yield of 3.0% based on Friday’s closing price.  The stats page shows $114M of debt and $13M cash, a little more debt than I'd like to see, but not excessive.  Those figures are as of 31 Dec 07.  During the conference call they stated debt was $111 million at the end of March and they plan on paying down about $20 million of debt over the rest of the year. 

An interesting thing happened last week.  NNBR reported actual earnings.  When I closed this last year, I thought it was a good investment IF they turned the business around. 

Revenues for the quarter ended 31 March were $121.5 million.  Annualized, that puts the company selling at about a third of sales.  Earnings for the quarter were $5.1 million or 0.32 per share.  Annualizing that rate gives a PE of 8.6. 

According to the conference call, about 70% of the revenues come from outside the US and their customers have strong business forecasts.  Also key, they are able to pass higher material costs along to their customers. 

NNBR is still seeing weakness in their plastics division, which sells to the automotive industry.  But that’s in their forecasts.  Key quote from the earnings release – Roderick R. Baty, Chairman and Chief Executive Officer commented, “In the latter part of 2007, we began to see evidence of improvements in three operations – Whirlaway, Slovakia and China.  During the first quarter of 2008, we experienced improved profitability and operating margins at each of these locations as compared to the prior year, due mainly to higher capacity utilization resulting from new business awards at all three operations.” 

If they’ve turned the poor performing business segments around, the stock could easily double over the next year.  If the last quarter was just a blip and they return to poor performance, my CAPS score will suffer again.  I haven’t bought any again in real life yet.

2 Comments – Post Your Own

#1) On May 03, 2008 at 1:28 PM, abitare (88.82) wrote:

$175 million CAP and $114 debt? And they still pay a 3% dividend! And they "sells to the automotive industry"

No thanks...that takes more bravery then I have.

Good post, anyways. 

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#2) On May 03, 2008 at 4:10 PM, rd80 (98.19) wrote:

Thanks for the comment.

The debt and 'supplier to automotive' had me hesitate before making the pick.  They do plan on paying down a sizeable chunk of the debt and weak auto business is already in the numbers.

Automotive supply is less than 20% of their business, don't want to listen to the call again, but I think it was 17% of revenues. 

Not sure yet if making this pick required bravery or stupidity.

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