2023-06-30 17:59:07 ET
Summary
- MSA Safety has seen a 27.9% increase in its stock price, outperforming the S&P 500's 9.7% rise since late February. This is attributed to robust performance, particularly in revenue.
- Despite a net loss in the first quarter of 2023 due to a loss on the company's divestiture of MSA LLC and a spike in provision for income taxes, the company's adjusted operating profit and EBITDA saw an increase.
- I maintain my 'hold' rating on the company due to the current share price. I believe that while MSA Safety will perform well in the long run, there are better investment prospects on the market at the moment.
Mr. Market can be incredibly fickle. Sometimes, investments that you expect to perform well can perform poorly, even for an extended period of time. In other instances, the exact opposite occurs where you have an investment that outperforms what you reasonably thought it might. One firm that fits this latter description that I have a history of analyzing is MSA Safety ( MSA ). As a refresher for those not terribly familiar with the enterprise, it focuses on the sale of emergency equipment, such as a self-contained breathing apparatus, fixed gas and flame detection instruments, fall protection equipment, firefighter helmets, and more. Recent financial performance provided by management has been mixed. But when you dig deeper under the hood, the situation has actually been quite bullish. Add on top of this the fact that management has high expectations for the current fiscal year, and I can understand why some investors might be drawn to the enterprise. But when you consider how shares are priced at the moment, I do believe that a more appropriate stance is to be neutral on the business.
Putting recent performance into perspective
The last time I wrote about MSA Safety was in an article published in late February of this year. Financial performance in the final quarter of the company's 2022 fiscal year had been rather mixed. Sales were rising, but bottom line results were a bit of an issue. All things considered, I believed the company to be a solid operator in its space. But that didn't change the fact that shares were a bit pricey. The price, in fact, was the primary reason why I ended up rating the company a ‘hold’ instead of a ‘buy’. Unfortunately for me, the market had other plans. While the S&P 500 has jumped 9.7% since the publication of that article, shares of MSA Safety have seen upside of 27.9%.
This surge higher has been driven, I believe, by continued robust performance, primarily on the top line. During the first quarter of the company's 2023 fiscal year, for instance, revenue came in at $398.3 million. That's 20.4% above the $330.7 million the business generated one year earlier. The lion’s share of this revenue increase came from the company’s operations throughout the Americas, with revenue spiking 24.2% from $225.7 million to $280.3 million. Revenue growth for the company as a whole would have been even greater had it not been for foreign currency fluctuations that impacted sales negatively to the tune of 1.6%.
In the Americas, the growth for the company was driven by all major product lines, most notably the portable gas detection and firefighter helmet and protective apparel that the company sells. Management attributed this to strong demand and the company's ability to hike production in order to meet that demand. In what I can only interpret to be a good sign, the company said that strong order growth experienced during the quarter caused backlog to increase ‘substantially’ for all of the company’s product lines. Unfortunately, management has not provided details on the magnitude of this increase.
When you dig deeper and look at the bottom line, the picture becomes a lot more difficult to understand. At first glance, the enterprise looks like a mess. The firm went from generating a net profit of $35.5 million in the first quarter of 2022 to generating a net loss of $150.2 million the same time this year. However, the most significant contributor to this worsening bottom line was a $129.2 million loss on the company's divestiture of MSA LLC. In addition to this, the company saw its provision for income taxes spike from $9.9 million in the first quarter of 2022 to $82.4 million the same time this year. If we only look at operating profit and strip out the aforementioned loss, then we would actually have seen a rise in profitability from $42.7 million to $69.2 million. Operating cash flow also declined, turning from $24.5 million to negative $285.9 million. But if we make certain appropriate adjustments, including those associated with changes in working capital, we would see this number improve from $56.5 million to $65.6 million. And finally, EBITDA for the company grew from $65.7 million to $89.6 million.
Management has not, unfortunately, really granted any meaningful look into the future. But they did say that the current environment is ‘very dynamic’ because of continued supply chain constraints, the availability of certain materials, employment rates, changes in interest rates, and a variety of other factors like geopolitical risks. If we assume that the first quarter of this year ends up being indicative of what the rest of the year will look like, we could estimate that the firm would generate adjusted operating cash flow of $297.8 million this year and EBITDA of $460.3 million.
Taking these figures, it's not that difficult to value the company. As you can see in the chart above, shares are trading at a forward price to operating cash flow multiple of 22.1. This is down a bit from the 25.7 reading that we would get using data from 2022. For context, results for both years, as well as for 2021, can be seen in the chart above. One area where we do see a meaningful improvement is in the EV to EBITDA multiple. This number declined from 25.6 in 2021 to 21.7 last year. If my estimate for 2023 turns out to be accurate, which I do think investors should take with a grain of salt since nobody knows exactly what the future holds and even management acknowledged uncertainties about, then the EV to EBITDA multiple for the company should drop to 15.9. Usually when I write an article like this, I also like to compare the company to similar enterprises. But at the end of the day, the companies that tend to be most similar to this focus on the production and sale of office supplies. I believe that this is a bridge too far and that comparing it to such enterprises might do more harm than good.
Takeaway
At this moment, I probably sound like a broken record. But I do think that, even though financial performance achieved by the business recently has been fantastic, shares are a bit pricey for me. In the long run, I have no doubt that MSA Safety will do just fine for itself and its shareholders. But given how shares are priced, I do believe that there are definitely better prospects that could be had on the market right now. So even though I am risking, once again, being wrong when it comes to upside, I do believe that the ‘hold’ rating I assigned the stock previously makes sense.
For further details see:
MSA Safety: Assessment Unchanged