MSA develops, manufactures and supplies products that are intended to protect users from hazardous or life-threatening atmospheric situations. Their products are used by workers in the oil and gas, fire service, mining and construction industries, as well as the military. Listed industry peers include Sperian Protection, Abatix Corporation, and Lakeland Industries.
I get it, I’m simple-minded, or at least many folks have told me I am. I see what the company does to earn its bread and I think so what? What does that have to do with the stock price being extremely overinflated? I mean look at the numbers, and these are just a few of the metrics that many investors like to use.
A trailing twelve month PE of 67, an enterprise value to free cash flow of 45, a price to free cash flow of 41, an enterprise value to EBITDA of 53, and merger and acquisition return period of 53 years. Not to mention a leverage ratio of 7, debt growth of 22%, year over year free cash flow growth of -38%, and year over year earnings growth of -51% even though the company spent $216 million on acquisitions.
Then this morning I read that the wizards at R.W. Baird and Company upgrade the stock to Outperform with a target price of $98, and included this comment which I thought summed up their rating upgrade perfectly. “…outlined long-term financial targets that were consistent with his expectations and reflective of a shift from optimizing the portfolio/cost footprint to one focused on leveraging broadening macro demand.”
Really? What does “leveraging broadening macro demand” even mean? People really believe this dribble? Save us all if folks think this means anything!
Here’s a more pragmatic approach to this particular company. RUN MATILDA RUN!!!
In the end, my investment thoughts on the company are pretty mundane compared to the analytical wizards of Wall Street because my short-term (3-6 week hold) target price for the stock is $85.47, with an initial trailing stop at $81.70.
Also, my future (5-year hold) target price for the stock is $155, which is an average annual return of 17%. A prior five-year hold of the stock would have returned an average of 17% per year. Somehow I don’t think the wizards are expecting an investor to hold the stock 5 years to reach their $98 target.
Please be aware that past and future gains are based on actual and anticipated earnings. Please also be reminded that any investment has the potential for loss, and past performance is no guarantee of future results.
To be as fair as I can be, I even took into account the 2017 Tax Act, because I know that income tax adjustments can skew valuations.
In the case of MSA Safety, “…the company has calculated its best estimate of the impact of the Act and has recorded income tax expense of $19.8 million during the fourth quarter of 2017, the period in which the legislation was enacted. Of this amount, $18.0 million related to the one-time transition tax and the remaining $1.8 million was related to the revaluation of U.S. deferred tax assets and liabilities.”
Had there been no tax benefit the company’s 2017 earnings would have been $1.65 instead of $1.23, my baseline valuation would have been $28 instead of $25, and my fair value estimate would have been $19 instead of $14. Regardless, none of these numbers come close to resembling $98.
One other item of note or at least one I found interesting were the number of insider transactions over the past year which totaled 234 and involved 1,203,673 shares of stock. What I found interesting was of the 234 insider trades, 95 were Buys involving 385,161 shares of stock, and 139 were Sells involving 818,512 shares of stock, creating an insider buy to sell ratio of 0.5:1. Just makes me wonder why the insiders are selling more than they are buying?
I always like to end with the call that is often heard at auctions, Fair Warning. It simply means that the time for bidding has ended and a sale is about to be concluded.
When it comes to MSA Safety Incorporated (NYSE: MSA), my fair warning call is sell because I believe the stock is extremely OVER VALUED.
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