Though I'm definitely a finance nerd, I don't run valuation exercises simply for the pure, unadulterated joy of crunching numbers. Earlier this month, I examined the valuation for Teva Pharmaceutical (Nasdaq: TEVA) to see whether it was worth advancing from my watchlist into my portfolio. Turns out, it was, and I've since added the stock to my personal holdings.

Today, I'll pull another stock from my watchlist -- National Presto Industries (NYSE: NPK) -- to see whether it's ready for a promotion to my real-money holdings.

Earnings expectations
As I outlined in a previous article, a good way to get a baseline for growth expectations is to check on what Wall Street analysts expect and how fast the company has actually grown in the past.

Time Frame

Annual Growth Rate

Analysts' estimates N/A
10-year historical 16.6%
5-year historical 29.3%
3-year historical 15.5%
Last 12 months (5.1%)

Source: Capital IQ, a Standard & Poor's company. Historical growth based on diluted earnings per share.

National Presto is a quirky little $700 million company whose businesses include housewares (pressure cookers, deep fryers, shoe polishers), defense products (munitions, firing devices, cartridge cases), and absorbent products (adult diapers). In light of that, it's not surprising that the company has little Wall Street coverage and no long-term growth estimates. If we want to figure out how fast the company will grow, we're on our own.

Economic pressure has squeezed the top line in the housewares and absorbent products segments. Worse yet, notice how deeply rising commodity costs have eaten away at profitability. In discussing its 2010 results, the company said it fully expected that 2011 would be a challenging year for exactly this reason, and the first quarter seemed to prove that.

However, I look out a bit longer than just the next year. I believe that commodity pressures will eventually start to moderate, and that the company can use pricing power and increased efficiency to help balance out the commodity-price bloodletting.

Optimistically, I could see the company growing as much as 10% per year over the next five years. My base case, however, is a much more modest 5%, while my downside case calls for 3% annual growth.

Pinning down valuation
Valuations are a moving target, but as with growth above, using a range of values can give us a view of our potential returns without requiring Miss Cleo-type prescience.

In creating our range, we can start with where the stock is trading right now, and what its historical trading range has been. Right now, National Presto's stock changes hands at 11.2 times trailing earnings. This is at the cheaper end of the stock's range, but it's rarely traded at particularly high multiples. Excluding one-time events, on an average-annual basis, National Presto's earnings multiple has topped out around 20, while 11 is the bottom of the range.

For broader context we can also look at how similar companies trade.


Forward P/E

Estimated 5 Yr Annual Growth

AeroVironment (Nasdaq: AVAV) 27.7 25%
Ceradyne (Nasdaq: CRDN) 11.5 14%
Newell Rubbermaid (NYSE: NWL) 9.6 10%
Kimberly-Clark (NYSE: KMB) 13.3 6%
Tupperware Brands 14.2 13%
Raytheon (NYSE: RTN) 9.6 9%

Source: Capital IQ, a Standard & Poor's company.

Given National Presto's varied business lines, it's understandably difficult to come up with a set of comparable companies. Instead, I've picked out companies that stack up with Presto's individual businesses: AeroVironment, Ceradyne, and Raytheon on the defense side; Newell Rubbermaid and Tupperware for housewares; and Kimberly-Clark for absorbent products.

Defense is Presto's largest segment, and with the exception of AeroVironment and its expected blazing growth, the defense companies carry relatively low multiples. The consumer-goods companies are a bit higher on average, but they're still very modest.

So where should we peg National Presto? For my base case, I assumed that investors would give it only a slightly better multiple at 12 times earnings. For my upside scenario, I bumped that up to 15 and cut it to 10 for the downside case.

Dividends and share count
Finally, let's consider how much we'll get paid through dividends, and whether changes in share count will affect our bottom line.

I tend to fret that a company will issue boatloads of shares and dilute my ownership stake. Fortunately, National Presto's share count has actually declined slightly over the last decade, and largely stayed stable.

Dividends are another story altogether for Presto. Investors who want a company to commit to a nice, big dividend year-in and year-out may come away disappointed with Presto's approach. The company's $1 regular dividend, held steady for a few years now, represents a measly 1% yield.

However, Presto has gotten in the habit of issuing an annual special dividend. The most recent was $7.25, giving the stock a total trailing yield of 8.1% -- a yield that almost anyone can get excited about.

Considering Presto's cash flow and commitment to returning capital to shareholders, I made the optimistic assumption that it will continue to grow its total payout -- that is, build on the $8.25 that it returned to shareholders over the past year. However, I assumed that dividend growth would proceed at a slightly lower rate than earnings growth, so the upside, base, and downside cases were set at 8%, 4%, and 2%, respectively.

The verdict, please!
The end results of all of this are the returns we can expect under the various scenarios. Here's what my three scenarios would look like.


Annual Earnings-per-share growth

Earnings Multiple

Annual Dividend Growth

Expected Annual Returns

Upside 10% 15 8% 24.4%
Mid-case 5% 12 4% 14.7%
Downside 3% 10 2% 9.3%

Source: Author's calculations.

Let's now go back to that question that we started with: Could National Presto's stock double your money?

Under the optimistic case, the answer is a most definite "yes." In fact, it would triple your money. Even under the base case, I'm expecting a double. And while I do admit that I was still relatively optimistic in the bottom case -- specifically, assuming that the big special dividends would continue -- 9.3% annual returns would be a fantastic downside scenario.

So will Presto follow in Teva's footsteps and find a spot in my personal portfolio? With numbers like these, I don't see how I can afford to pass it up.

Of course, the future is an ever-changing picture. You need to keep on top of what's going on at Presto to see which set of numbers the company and stock are able to live up to. And you can do just that by adding the stock to your Foolish watchlist. Don't have a watch list yet? Start one up by clicking here.

The Motley Fool owns shares of National Presto, Tupperware Brands, Raytheon, and Teva Pharmaceutical. Motley Fool newsletter services have recommended buying shares of Kimberly-Clark, Teva Pharmaceutical, and AeroVironment. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Teva, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.