Bear of the Day: EnPro (NPO)

Todd Bunton
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EnPro Industries (NPO) recently delivered disappointing third quarter results as sales and profit margins declined meaningfully.

Analysts revised their estimates significantly lower for both 2013 and 2014, sending the stock to a Zacks Rank #5 (Strong Sell).

With shares trading well above their historical median on both a price/earnings and price/book basis, investors should consider avoiding this stock until its earnings momentum improves.

EnPro Industries provides engineered industrial products for the processing and general manufacturing industries worldwide. It operates in three segments:

  • Sealing Products (54% of sales)

  • Engineered Products (31%), and

  • Engine Products & Services (15%)

Third Quarter Results

EnPro Industries reported disappointing third quarter results on November 1. Adjusted earnings per share came in at 53 cents, well below the Zacks Consensus Estimate of 78 cents. It was a 35% decline from the same quarter last year.

Sales fell 5% to $276.0 million, missing the consensus of $293.0 million. The decline was driven in large part by weakness in the 'Engine Products & Services' segment, which saw sales plunge 34%. This was primarily due to lower demand for parts and service from U.S. government markets. Sales were down 3% in the 'Engineered Products' segment but rose 4% in the 'Sealing Products' segment.

Segment profit margin declined from 12.9% of sales to 10.7%, driven by lower volumes and a less profitable mix in the 'Engine Products & Services' segment.

Estimates Falling

In the Q3 press release, CEO Steve Macadam warned that '[i]n our U.S. government markets, we expect demand for aftermarket parts and services to remain low. In this environment, we expect our total fourth quarter sales to be about the same as in the fourth quarter of 2012, but operating profits are likely to reflect a higher portion of our sales into original equipment markets, where margins tend to be lower. As a result of these factors, our segment profits may decline in comparison to the fourth quarter of last year.'

This prompted analysts to revise their estimates significantly lower for EnPro, both for 2013 and 2014. This sent the stock to a Zacks Rank #5 (Strong Sell).

The Zacks Consensus Estimate for 2013 is now $2.40, down from $2.90 just 30 days ago. The 2014 consensus is currently $2.70, down from $3.35 over the same period.

Premium Valuation

Shares of EnPro are down more than 5% since the Q3 press release, but the stock is still not cheap. Shares trade at a lofty 21x 12-month forward earnings, well above its historical median of 11x.

Its price to book ratio of 2.1 is also well above its historical median of 1.4.

The Bottom Line

With declining sales and profit margins, falling earnings estimates, and premium valuation, investors should consider avoiding EnPro.

Todd Bunton, CFA is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.


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