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Northfield Precision Instruments Corp (NFPC) - A Dark OTC Nanocap trading at a P/E of 6.5 and a P/S of 0.52

11/24/2018

9 Comments

 
I recently contacted Northfield Precision Instruments Corp (NFPC) to see if I could get hold of the company's current financials. They kindly offered to mail them out to me, no questions asked, and I received them a few days later. I wish all dark companies were as amenable to requests!

Here's the back story on the firm.

NFPC is a New York based manufacturing company whose business involves the manufacture of precision instruments including air, diaphragm and collet chucks.

Picture
Source: http://www.northfield.com

The firm was founded in 1952 and went public in 1959 with intial product offerings including "micro spin bearings, precision gear blanks, precision shafting, precision limit stops and miniature slip clutches for the electronic industry".  The company has since grown its product range and now serves the following industires; automotive, aerospace, electrical/electronic, medical/optical, machine tool, plastics/ceramics, appliance, and education/training. 

NFPC currently trades on the OTC markets and is classed as 'Pink No Information' and 'Dark or Defunct'.


So we have a company which has been around for years engaged in the unexciting business of making small parts for machinery, they don't file with the SEC and their website looks 20 years out of date (Remeber Lynch's advice, companies with crappy looking annual reports etc are probably frugal and don't wish to waste money on flashy graphics).

I'm interested so lets keep digging.

Now to some numbers;


Market Cap = $3,747,792

Shares Outstanding = 234,237

Price per share = $16

Spread = 18.68%


Average Vol (30D) = 51

52WK Range = $13-$16

Dividend = $0.75

Dividend Yield = 4.69%

The tiny market cap, low share count and illiquidity are all good signs. Now we'll dig into the company's most recent annual financials (Dec. 31st 2017) to see if we can figure out what NFPC is worth.

Firstly to the balance sheet;


Current Assets = $3,117,028

which includes;

Cash = $702,060
Receivables = $932,976
Inventory  = $1,376,547
Other Current Assets = $$105,445

Fixed Assets = $1,644,250

which includes;

PPE = $1,578,067
Security deposits = $637
Officer's Life Insurance = $85,546

Current Liabilities = $653,774

Long-term liabilties = $483,429

Total Liabilties = $1,137,203

Book Value = $3,644,075

And now on to the income statement;

Sales = $7,225,759
Gross Profit = $3,668,257
Operating Profit = $$861,815
Net Profit = $575,210

So NFPC is currently trading at;


1.02x BV
0.52x Sales
6.5x Earnings

We'll now take a trip back in time to see what NFPC has looked like in the past. The following data is cobbled together from information I found in my old Walker's Manual and the 2015 & 2017 annual reports that NFPC sent me. As such I only have data for the periods 1998-2001 and 2013-2018 but this is enough to make some basic inferences.


Picture
Picture

 As one can see, both earnings and dividends have been lumpy over the last 20 years and this is not suprising given the cyclical nature of the manufacturing sector. Book value has grown at an annualized rate of 1.93% between 1998-2017 which is below the long-term (1913-2015) average U.S. inflation rate of 3.18%. The company has historically paid out a large portion of its earnings as dividends which is both a blessing and a curse. The high yield is obviously appealing to some investors but the lack of reinvested earnings  may have limited the company's growth. 

So what is NFPC worth?,

It has a history of profitability so one could argue it is at least worth BV which gets us to $15.55

Typically a no growth company is assigned a P/E of 7-8. Whilst NFPC is growing we know it's earnings are likely to suffer when the next down turn comes around so we'll value it at a 7-8 P/E and assume no growth.

This gets us to $17.22-19.68

What if earnings are cut in half when the next recession hits?

 EPS of $2.46 becomes $1.23,

Valued at a P/E of 7-8 gets us to $8.61-$9.84

Can we stretch the valuation and assume a P/S of 1 giving us a fair value of $30.84?, I'm inclined to say no. Dark companies are always going to sell at a discount to their listed peers and we are looking at a cyclical firm. The most I would go with would be a P/S of 0.75x which would be $23.13

So, we've got an intrinsic value range of around $9-23. This is a wide range of potential value. I'm drawn to the lower end of the range given where we are in the current cycle.  I think in the next 5-10 years NFPC is going to trade closer to $9 than $23. The current share price of $16 sits squarely in the middle of the range.

The current dividend yield of 4.69% plus BV growth of 1.93% gets us an assumed return of 6.62%. I'm of the opinion that a much lower entry price is required to make this a viable investment.




Now to the chart;

Picture

NFPC's share price has been on an upward trend over the last few years on the back of stronger earnings growth , a recent write up over at Focused Compounding may have also driven it higher. The stock currently sits at an all-time high of $16 above it's previous point of resistance of $15 which was hit back in the late 90's and 2014-2015. Previous support levels appear to be around $6.5-7 which were touched after the dotcom bubble, the 2008 financial crisis and in 2011.

The current rise has not been on heavy volume suggesting there could be further upside but Ted Warren would say it was limited. This rally was not built from a long-term base but rather from an intermediate short term base of $10 between 2016-2017. Ted would say that one should not expect much beyond a 50% rise, given that NFPC has moved up 60% I'm not confident it will run much higher.

There's also no guarantee that the BV can offer a floor on the stock price, the stock has sold below BV before and it can fall below it again. I know I said earlier in the blog post that NFPC should be at least worth BV but what I think doesn't drive the stock price.


Stock price movement is driven by perception, not facts and figures. This isn't to say that the facts and figures are irrelevant but virtually everyone is irrational most of the time. Stock prices are driven by sentiment, stories and emotions.

The time to buy is at the point of maximum pessimism, when a stock languishes after the heavy selling of a downward trend has subsided and the public have given up the ghost.

Investors should avoid buying into upward trends built on short-term bases, especially those which rally on heavy volume. The upside comes from feelings of revulsion, turning to indifference. and then to increasing interest in a stock.  Patience will reward investors with a more suitable entry point for NFPC, somewhere closer to $7.

The lower the entry point, the higher the potential upside.


Thanks for reading,

David

The author holds no ownership in NFPC at the time of writing.

9 Comments
Dan schum link
11/28/2018 01:14:31 am

The mention of Ted Warren brings a smile to my face

Reply
David
11/28/2018 07:16:47 pm

I thought you'd get a kick out of that Dan :)

I just picked up 'Winning Big With Bargain Stocks:How to invest successfully in new issues,warrants,and stocks of turnaround companies under $10' by Bill Matthews

and

"Special Situations in Securities' by Maurece Schiller

Both are worth picking up. Lots of good stuff in them.

Reply
Dave
1/4/2019 08:44:23 pm

I just found the blog today (and thank you for creating it). It appears that you fish in the same waters as Oddball Stocks and No Name Stocks.

One big consideration with attempting to use the 2017 EPS is how much was it was due to the one time impact of the TCJA (which reduced corporate income tax rates; which in turn could have had a large positive or negative effect on EPS, as deferred tax assets and deferred tax liabilities were reduced, due to the change in the effective rate). This information should be presented in the income tax footnote.

I also wonder what happened between 2001 and 2013, as there was only about $1.70 of increase in BVPS (and it increased by that much in both of the 4 year periods you present).

Reply
Trey Henninger link
6/28/2019 06:27:32 pm

David,

What do you think of the most recent financial report for 2018? Does it change your thesis at all? To me, the business seems to be growing and expanding.

Reply
David
6/28/2019 07:03:52 pm

Hi Trey,

I've not seen the most recent financial report so I cannot comment on that. I'll have to get in touch with them to see if they can send me a copy out.

I'm looking for an entry point when a company has either been completely forgotten or left for dead. I want to see a long range chart where a stock has drifted to an alltime or multi year low and has been forming a base for a while. I like to buy at a discount to NCAV or Net Cash and then to wait.

NFPC may be growing it's business and expanding but the price and the chart do not fit my criteria. I'm looking for multi-baggers and it's a lot harder for a $15 stock to go to $45 than it is for a $3 stock to go to $9.

This isn't to say that NFPC isn't a good company with a competitive advantage and good long-term prospects, I just need the right price and chart.

Regards,

David

Reply
Trey Henninger link
6/29/2019 03:40:55 pm

David,

Thank you for the response. I think I understand your position now. It sounds like you’re more interested in buying super deep value stocks than stocks undervalued simply due to growing earnings.

Do I understand that correctly?

In short, NFPC earnings spiked again this year almost doubling to over $4 per share. We now have three years of 100% annualized earnings growth. I figured that was interesting on its own, but it is a significantly different thesis than the one you laid out here.

Best regards,
Trey

Luke
9/16/2019 06:23:48 pm

Trey, when did you receive your 2018 Annual Report and what brokerage do you use? I still have not received mine.

David, did you ever receive yours (assuming you own a share)?

David
6/30/2019 02:01:21 pm

Hi Trey,

Yes, my interest is primarily in buying super deep value stocks regardless of whether the company is a good business or a cigar butt. If it's a great business and I can buy it super cheap then I will buy and hold, if it's a cigar butt I'll sell it when the mispricing corrects.

I would certainly buy NFPC if the price and chart look right to me but at the current time they do not.

Regards,

David

Reply
David
9/16/2019 09:08:36 pm

Hi Luke,

I don't own shares in NFPC. I got financials by simply e-mailing the company and asking for them. If you hold your shares through your broker they are probably held in street name which will mean you won't be on the shareholder register. Just e-mail the company and they'll likely send them out to you.

Reply



Leave a Reply.

    David J. Flood

    UK based Investor. I focus
    ​on Net-nets, Pico/Nano caps, AIM/OTC/Dark stocks & Special Situations. Balance sheets & Long-range price charts are my guide. Looking for inflection points. Do not construe my blog as investment advice, always conduct your own due diligence.  Caveat Emptor!


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