#113: Trey Henninger; Northfield Precision Instruments Corporation (NFPC); A Cheap Dark Stock

Summary   Today's interview guest is Trey Henninger. 
  Trey Henninger runs the blog and podcast, DIY
Investing. Trey is a private value investor focused on microcap and
dark stocks in the United States. His focus is on high-quality
companies with predictable durable earnings where management has
skin-in-the-game. Trey runs a concentrated portfolio of 5 stocks
with a 20% weighting each. By focusing on small companies, Trey
hopes to find overlooked compounders at value prices. His favorite
opportunities have a market cap below $50 million.   

 
Focus Stock: Northfield Precision Instruments Corporation
  Basic Company Information:   Name: Northfield Precision
Instruments Corporation Stock Ticker: $NFPC Location: New York,
United States Industry: Industrial Manufacturing Market Cap: $5.3
million TTM Earnings: $668k   Shares Outstanding: 234,237
(constant, no change in the last 5 years) Stock Price: $23.00 TTM
EPS: $2.85 (based on 2019 FY results)   P/B: 1.09 P/E: 8.07
Earnings Yield: 12% Dividend Yield: 2.6% (based on 2019 dividends)
3-year Earnings CAGR from 2015 to 2018: 100.4% (EPS was $0.53 per
share in 2015) - dropped a bit in 2019.    Investment
Thesis   Northfield Precision Instruments Corporation is a
niche manufacturer of precision air chucks. Precision is a keyword
because very careful machining is required in the manufacturing
process to meet the required specifications. Northfield is a
leading manufacturer in the air chuck industry although the market
is quite small. Northfield manufacturers for a worldwide customer
base out of a single manufacturing location in New York State,
United States. This single manufacturing facility has room for
production expansion without adding additional space. The
combination of being a small manufacturing concern with room to
grow is that Northfield is a huge current and future beneficiary of
expanding operating leverage. They have a fixed cost base and are
able to sell their goods at a consistent and sustainably
competitive gross margin. Gross profit margins are consistently in
the 45-50% range over the last 6 years.    Northfield is
undervalued significantly as they trade for a single-digit P/E
while in the process of rapidly growing their earnings. They have
been able to sustain a high growth rate because incremental returns
on capital clearly exceed 50%. It is my view that Northfield has
remained undervalued for two key reasons: They are a small nano-cap
company with a market cap below $5 million and they are dark.
Northfield doesn't report to the SEC and the only way to
receive financial statements is to email their accountant and
request physical copies sent by mail.    Earnings History
2015 = $0.53 per share 2016 = $1.05 per share 2017 = $2.46 per
share 2018 = $4.27 per share 2019 = $2.85 per share 3-yr avg =
$3.19 per share   As Northfield grows earnings above $1m per
year over the next few years and starts to earn multiple millions
of dollars per year, they will be able to justify spending money to
include their financial reports on OTC Markets. This will grow
their potential investing audience and likely broaden their
appeal.    Potential Risks

Northfield is an industrial manufacturer which means it is
not immune to cyclicality in the economy. With the current
recession, we should expect earnings in 2020 to be lower than in
2018 and 2019. They are likely considered an essential business,
so I doubt they would be drastically affected. However, a dip in
earnings is both foreseeable and expected. Yet, I expect that
earnings will grow again after this recession ends to exceed
the 2018 high in earnings. 

They are highly illiquid. It is difficult to buy shares in
the market. It took several months for me to acquire my full
position. I think liquidity is largely constrained because
current large shareholders are unwilling to sell at such a low
price while the profitability of the company continues to
improve. 

  In summary, Northfield Precision is a dark company with
a low single-digit P/E and a high earnings growth rate. They are
able to profitability reinvest their earnings into growth at a high
ROIC. While a 2020 recession will slow their progress, Northfield
is on the way to becoming a much larger and more profitable
company. Simply trading from the current P/E of 8 to a market
multiple of 16 would double the stock price. The earnings growth
and ROIIC should justify an even higher multiple though. The
biggest downside is simply that the company is small and
overlooked. It is hard to predict which a company of this size will
begin to get a bid in the market. Yet, the low liquidity in shares
should ensure that once interest grows the stock price will jump
quickly.    Connect With Trey Henninger

Twitter: @TreyHenninger 

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Disclosure: Eric Schleien and some SMA clients of Eric Schleien
through GSCM own shares of NFPC. Nothing here is investment
advice. Do your own due diligence.