Commentary

Valuation: EnPro Industries, Inc. (NPO)

Company Review: EnPro Industries, Inc. (NPO)

Company Profile: EnPro Industries, Inc. (obtained via Yahoo Finance)

EnPro Industries, Inc. engages in the design, development, manufacture, and marketing of engineered industrial products. It operates through three segments: Sealing Products, Engineered Products, and Engine Products and Services. The Sealing Products segment provides metallic, non-metallic, and composite material gaskets; rotary seals; compression packing; resilient metal seals; elastomeric seals; hydraulic components and expansion joints; wheel-end component systems; polytetrafluoroethylene products; conveyor belting; and sheeted rubber products. These products are used in chemical and petrochemical processing, petroleum extraction and refining, pulp and paper processing, heavy-duty trucking, power generation, food and pharmaceutical processing, primary metal manufacturing, mining, water and waste treatment, aerospace, medical, filtration, and semiconductor fabrication industries. The Engineered Products segment offers self-lubricating, non-rolling, metal polymer bearing products; rotary and reciprocating air compressors; vacuum pumps; air systems; and reciprocating compressor components for use in the automotive, pump and compressor, construction, power generation, machine tool, pharmaceutical, construction, gas transmission, and general industrial markets. The Engine Products and Services segment offers heavy-duty and medium-speed diesel, natural gas, and dual fuel reciprocating engines for marine propulsion, power generation, and pump and compressor applications. EnPro Industries operates primarily in the United States and Europe. The company was founded in 2002 and is headquartered in Charlotte, North Carolina. EnPro Industries Inc. operates independently of Goodrich Corp. as of May 31, 2002.

Business and Management Review

1) Is the business simple and understandable?

This is an understandable business as this company is the leading provider of engineered industrial products for processing, general manufacturing and other industries worldwide. Moreover, the end-users of EnPro Industries, Inc. products operate in dozens of different industries, including chemical and petrochemical processing, petroleum refining, pulp and paper manufacturing, food processing, pharmaceutical manufacturing, truck and trailer manufacturing, freight hauling and shipping, U.S. defense and shipbuilding, and commercial and municipal power generation. This can give us an idea that this is a business that is expected to be sustainable and stable over the medium and long run.

2) Does the business have a consistent operating history?

EnPro Industries, Inc. has been one of the stronger performers in its industry over the five-year period. Most stocks, including EnPro Industries, Inc., in the machinery industry have seen steadily growing revenue and impressive earnings growth over the past three years as multinational oil and natural gas businesses overseas have expanded. In stark contrast to its peers, this stock’s earnings per share have fallen over the past three years, which may had been cause by the accumulation and reversion of deferred tax liabilities and reinvestment of funds to generate internal growth.

3) Does the system have favorable long term prospects?

The stock’s forward earnings yield is 12.05%, which not only is much higher than the earnings yield of other stocks in its industry but it is extremely healthy in absolute terms. Also, over the long haul, this company has posted results that are about average for its industry. NPO’s net profit and operating margins have been average compared with other companies in its industry. These margin growths are strong indicators that the company has been profitable. In addition, this company shows steady numbers for ROE which has recently increase to 10.5%, which means that an investor will receive 10 cents for every dollar they invest into the company.

4) Is management rationale?

The persistent fundamentals strength of NPO, speaks well about the quality of the management that runs the company.

5) Is management candid with its shareholders?

The company is candid with shareholders as the latter can obtain any information on NPO stock performance, press releases, audited financial statements, and other useful data from the company’s website.

Financial and Value Review

Defensive:

1) Size of firm

Since this is a Small-cap stock, EnPro Industries does not pass this test. “Fail”.

2) Strong financial condition

NPO current ratio is higher than 2, so this test passes. “Pass”.

3) Earnings stability

EnPro Industries cannot pass this test since it was founded in 2002. However its Net Income has been negative 2 of the 7 years in which the company has been operating. “Fail”.

4) Dividend record

Thus far this company has not paid dividends. “Fail”.

5) Earnings growth

NPO has not had a constant EPS growth of 33% for the 7 years that has been in business. “Fail”.

6) Price to earnings analysis

The company passes this test as they have a PE of 19.6. “Pass”

7) Price to book analysis

EnPro Industries has a PB ratio lower than 2.5 and a PB*PE ratio lower than 50. Therefore, both of these tests pass. “Pass”/”Pass”.

Conclusion

Having passed half of the Defensive tests, we do not consider NPO to be a suitable investment for Defensive investors.

Enterprising:


1) Strong financial condition

NPO posses a current ratio that is higher than 1.5 and a debt to NCA that is lower than 1.1; therefore passing both of these tests. “Pass”/”Pass”

2) Earnings stability

EnPro Industries, Inc. has not had a positive net income for the prior 5 years. “Fail”

3) Dividend record

No dividends are been paid by EnPro Industries, Inc. “Fail”.

4) Earnings growth

The current company’s earnings are 48.4 compare to 33.8 which were 5 years ago. “Pass”.

5) Price

This test fails as NPO price is higher than 150% of the net tangible assets. “Fail”.

Conclusion:

As EnPro Industries, Inc. passed only half of the tests, we do not believe this company to be a good choice for enterprising investors.

Valuation:

According to our model the current Fair value of NPO is $40.84.

Opinion:

Now, since the company is trading at $42.00 we believe that the stock is a bit overvalued even though it posses strong earnings growth and good fundamentals. On the other hand, but we do not find this company appropriate for neither Enterprise nor Defensive Investors.

Neither of us held a position in EnPro Industries, Inc. at the time of publication. Also, please read our disclaimer and Our Methods.

Andres Romero
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