RD's Picks

I'm revisiting a losing investment from last year, NN Inc. (NNBR). I had picked this as an outperform in Motley Fool CAPS. Shortly after picking it, they ran into real problems getting production on line at a new plant in China and a recent acquisition, Whirlaway, wasn't performing well. I also bought a little of the stock. Long story short - lost both money and CAPS points. If you're interested in that saga, you can find it by expanding the pitch for the 6/12/07 pick on the closed picks tab of my CAPS page.

NNBR is a small $175 M market cap company that makes bearing components and precision metal and plastic parts. They pay a dividend with a yield of 3.0% based on Friday's closing price. Yahoo's stats page shows $114M of debt and $13M cash, and a price-to-book value of 1.2. Those figures are as of 31 Dec 07. During the conference call they stated debt was $111 million at the end of March and they plan on paying down about $20 million of debt over the rest of the year.

An interesting thing happened last week. NNBR reported actual earnings. When I closed the CAPS pick last year, I thought it was a good investment IF they turned the business around.

Revenues for the quarter ended 31 March were $121.5 million. Annualized, that puts the company selling at about a third of sales. Earnings for the quarter were $5.1 million or 0.32 per share. Annualizing that rate gives a PE of 8.6.

According to the conference call, about 70% of the revenues come from outside the US and their customers have strong business forecasts. Also key, they are able to pass higher material costs along to their customers.

NNBR is still seeing weakness in their plastics division, which sells to the automotive industry. But that's in their forecasts. Key quote from the earnings release - Roderick R. Baty, Chairman and Chief Executive Officer commented, "In the latter part of 2007, we began to see evidence of improvements in three operations - Whirlaway, Slovakia and China. During the first quarter of 2008, we experienced improved profitability and operating margins at each of these locations as compared to the prior year, due mainly to higher capacity utilization resulting from new business awards at all three operations."

If they've turned the poor performing business segments around, the stock could easily double over the next year. If the last quarter was just a blip and they return to poor performance, my CAPS score will suffer again and my sloport will take a hit.

I entered a limit order at Marketocracy, but between a low limit price and very thin volume, only 100 shares have filled so far. I haven't been brave enough to buy any again in real life yet.

Other notes:
I'll be reducing my position in Graham (GHM). It's a great company and has had a fantastic run. But, the price is approaching my fair value estimate and, as much as I want to ride it higher, discipline dictates taking some profits. I will keep some shares in the game to see if the run continues. Will be doing the same in my real account.

AT&T closed over 40 on Friday. Maybe someone is finally realizing a 4% yield from T is a much better deal than 3% on a treasury.

You can make money swimming upstream. Over the course of SLO, I've made a whole 28 dollars on WFC along with a couple $k of dividends. Who'd of thought you could make money long a bank over the last nine months? Kind of like beating your head against the wall.

Also raised a little cash on Friday by reducing positions in BUD and CAG. Still waiting to see if SYY will come back down to buy in. If SYY keeps running, I'll re-evaluate the plan to swap out of CAG.

Disclosure: At time of posting, I own shares of GHM, T, BUD and WFC.

Recommend checking Marketocracy's dividend credits to your accounts. Three of my last four have been incorrect; they've either used the wrong number of shares or had the wrong dividend rate.

Jamie, can we get an update to the leaderboard?
ETA - Ask and receive! Thanks.

Thanks for reading and have a great week.

Comments: View Comments |  Saturday May 3, 2008  |  Stocks: nnbr,