Description

I wanted to keep this short in order to get it out, but I am more than happy to answer questions.

Quick Pitch

NPO is an industrial holding company that owns and operates five business lines (Garlock, Stemco, Technetics, GGB and CPI) in two segments (Sealing Products and Engineered Products). I will be brief here so I will refer you to Chalkbaggery’s 2015 write-up, which has some excellent detail on NPO’s business segments.

Since then, NPO has resolved its asbestos liability and sold its Engine Products segment. Both actions have served to clean up the public stock story (ie, no litigation overhang and fewer disparate segments to speak to). What’s left is a low leverage, solid industrial business trading at a ridiculously low price.

At ~$32 per share, the market is valuing NPO at <5x normalized EBITDA – Capex and a high teens normalized FCF yield despite having <1x net leverage (first maturity not until 2024), ~$370mm of cash and $770mm of liquidity (vs $315mm in 2019 opex).

While the collection of NPO’s business is not of the caliber of a ROP or PH, it is still a majority aftermarket, high margin, low capital intensity collection of assets that would be a bargain at 7.5 – 9.5x normalized EBITDA to a strategic or PE buyer (and was valued at those multiples not that long ago despite an inferior business mix to what it currently has). At this range, the stock would generate a double to a triple from its current price. This does not take into account the possibility that NPO uses some of its cash pile to buy back its stock (on its Q4 call, management signaled its intention to do so but has a somewhat mixed capital allocation track record). Coupled with a low likelihood of capital impairment (ie bk risk is low and the products they manufacture are not going away), I think NPO is offers a compelling risk / reward.

Why does the opportunity exist?

Small-cap (~$650mm), underfollowed (only a couple non bulge-bracket analysts cover the name given its paucity of debt issuance) industrial conglomerate with exposure to a variety of end markets (ie not a great way to play x, y or z specifically). 

Risks

Poor capital allocation (not insignificant given EnPro paid ~12.5x EBITDA for two high-growth, high margin acquisitions in 2019 that in theory should enhance its value to a strategic relative to Engine Products)

Catalyst

Time