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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era
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To: MAELING who wrote (1701)7/15/1999 11:28:00 AM
From: Benkea   of 1722
 
Maeling:

Thanks for the answer. I spoke to management and I was left thinking they are in the Buffett dilema - everything is too expensive right now.

The yield you quoted of 5% is only the dividend yield. The earnings yield is 7%. Further, while I agree the 4% munis (5.4% adjusted for taxes) are not terrific returns, if you analysis the company ex-cash (hoping they do something intelligent with at least some of it) you get quite a business. Ex-cash, I get an ROE of almost 70%. Additionally, I get an earnings yield of 17% ($2.68 earnings - $1.29 interest income = $1.39) divided by $8 ($40 stock price - $32 cash and munis) which is 3X the long bond.

I see this as a great place for extra cash that would ordinarily be in a money market. The dividend yield is over 1% above money market rates, and the earnings yield is over 1% above the long bond. Since NPK has the money parked in munis in approximately the following maturities: $50 mil expire 1999, $50 mil expire 2000, $50 mil expire 2001, this company is very cushioned from any rate movements. If rates go down, we do even better, but if they climb, we can redeploy upon maturity (not too far out).

Lastly, WHEN the meltdown comes, $250 mil in cash with no debt will provide for a VERY strong position sitting at the acquisition table across from those companies without such a strong balance sheet.
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