self-contained breathing apparatus, fixed gas and flame detection systems, handheld gas detection instruments, head protection products, fall protection devices and thermal imaging cameras. The company also provides a broad range of consumer and contractor safety products through a joint venture with MCR Safety. These products are marketed and sold under the Safety Works brand.
MSA is currently trading at a trailing twelve months P/E of 16.4 and a trailing twelve months EV/EBITDA of 9.39. Current P/E valuations represent a 22% discount to its five year average P/E of 21. MSA delivered an ROE of 18.4% over the past twelve months and a five year average ROE of 13.3%.
Financial and Business Risks
MSA has a moderate gross debt-to-equity ratio of 63% and a net gearing of 47%. This is partly mitigated by an interest coverage ratio of 7.
The safety products market is highly competitive, with players ranging from small companies focusing on a single type of personal protection equipment to a few large multinational corporations that manufacture and supply many types of sophisticated safety products. If MSA is unable to identify emerging consumer and technological trends, as well as maintain and improve the competitiveness of its products, it may lose market share.
MSA sources raw materials, including rubber, chemical filter media, eye and face protective lenses, air cylinders, certain metals, electronic components and ballistic resistant and non-ballistic fabrics from third parties. It has not experienced any problems in sourcing for raw materials, as they purchase these raw materials both domestically and internationally, and have close vendor relationship programs with the majority of its key raw material suppliers.
Business Quality and Capital Allocation
Demand for safety products are stable because purchases of these products are non-discretionary as they protect workers in hazardous and life-threatening work environments and because their use is often mandated by government and industry regulations. In addition, safety products need to be consistently replaced as many safety products have limited life spans due to normal wear-and-tear or because they are designed for one-
MSA is well balanced and diversified across products, markets and geographies, with no single product group accounting for more than 20% of sales. Also, outside of the United States, no single geographical region accounts for more than 20% of MSA's sales.
MSA focuses on operational excellence - optimizing operations and lowering costs at every possibility. In 2011, MSA eliminated some 18,000 part numbers and reduced inventories by more than $3 million. MSA also closed five factories, expanded its Brazil factory and built new factories in Mexico and China. It does not anticipate any need for new factory space in the near term. Efforts to optimize MSA's global sourcing are on track to provide greater security of supply.
MSA is a proven product innovator. Patent applications increased 230% in 2011, compared with 2009. Notable success included the Altair 5X series of portable multi-gas detectors with XCell sensors, which increased sales by 48% over the previous generation Altair 5, while delivering greatly and improved gross margins.
MSA's dividend history dates back to half a century ago and it currently sports a 2.9% dividend yield with a corresponding dividend payout ratio of 45%.
The non-discretionary nature of MSA's safety products business and a 50 year dividend track record are very attractive to investors in uncertain economic environments like this. However, valuations don't seem compelling.
The author does not have a position in any of the stocks mentioned.
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