Summary
- MSA Safety posted some rather mixed results for the final quarter of its 2022 fiscal year.
- Sales continue to rise, but bottom line results have been mixed, and this kind of trend is likely to continue moving forward.
- The firm is a solid operator, but shares are not cheap enough to warrant attractive upside at this time.
One thing that I have always liked is the idea of investing in companies that do well by doing good. This can take many forms, but the most common would be a scenario where the business in question provides a good or service, or both, that has a positive impact on the lives of others, the environment, or some other cause. One firm that definitely fits this description in my opinion is MSA Safety (MSA), a business that focuses on the production and sale of its own branded self-contained breathing apparatus, as well as fixed gas and flame detection instruments, fall protection equipment, firefighter helmets, and more. Just recently, on February 15th, the management team at the company announced financial results covering the final quarter of the firm's 2022 fiscal year. Relative to what analysts were expecting, the enterprise did quite well. Having said that, its overall fundamental condition has shown some volatility as of late. While I undoubtedly like the business from an operational perspective, I do still think that shares are not exactly at the right price to consider buying into.
Not bad
Late last year, around early December, I wrote an article discussing whether or not it would make sense for investors to seriously consider taking a stake in MSA Safety. Up to that point, revenue, profits, and cash flows had come in strong, helping to push shares up far greater than what the broader market had experienced. Given that movement higher though, and factoring in the firm's overall fundamental condition, I felt as though a 'hold' rating was the best that I could give the business. This rating reflects my belief that shares should generate upside or downside that would more or less match the broader market for the foreseeable future. Since then, that is precisely what transpired. While the S&P 500 is down 1.8%, shares of MSA Safety have seen downside of 2%.
As I mentioned already, February 15th was a pretty big day for shareholders of MSA Safety. On that day, the management team at the company announced financial results covering the final quarter of the firm's 2022 fiscal year. During that quarter, sales came in strong, hitting $443.3 million. That's 8% higher than the $410.3 million reported at the same time one year earlier. In addition to that, it also resulted in the company beating the expectations that analysts set for it to the tune of nearly $13.4 million. What's really interesting about this is that sales would have been higher, with growth totaling 11% year over year, had it not been for foreign currency fluctuations. Management attributed this sales increase to a combination of factors, including strong volume growth, strategic pricing, and a favorable product mix sold.
This rise in revenue brought with it mixed but mostly positive financial results on the bottom line. For instance, the company went from generating a net loss of $61.5 million in the final quarter of 2021 to generating a net profit of $51.5 million the same time of the 2022 fiscal year. On a per-share basis, the company reported profits of $1.13. That missed analysts' expectations by $0.17 per share. On an adjusted basis, however, net income of $1.80 per share beat out the amount analysts expected by $0.17 per share. It is worth noting that the massive earnings disparity here was driven by multiple factors. The most significant was a product liability and other operating expense category that fell by $149.2 million year over year. If we look at adjusted profits, the reading for the company came in at $70.9 million. That's up from the $66 million reported one year earlier. We should also pay attention to other profitability metrics. Operating cash flow, for instance, dropped from $69 million in the final quarter of 2021 to $53.6 million the same time of the 2022 fiscal year. Even if we adjust for changes in working capital, it would have fallen from $112.6 million to $76.8 million. Meanwhile, EBITDA for the company managed to increase, climbing from $91.7 million to $108 million.
The results experienced during the final quarter of 2022 had an obvious impact on results for the entirety of the 2022 fiscal year. Revenue, for instance, rose year over year, climbing from $1.40 billion in 2021 to $1.53 billion in 2022. Net income shot up from $21.3 million to $179.6 million, largely impacted by the aforementioned one-time events. On an adjusted basis, profits rose from $184.7 million to $222.5 million. As was the case in the final quarter, operating cash flow still managed to fall year over year, dropping from $199.1 million to $157.5 million. But on an adjusted basis, it ticked down only marginally from $257.4 million to $256.5 million. Meanwhile, EBITDA for the business expanded from $286 million to $337.5 million.
If we stick to the cash flow data that I believe is most valuable, valuing the company becomes fairly straightforward. There is, of course, one caveat that must be mentioned. This is that, in early January, the company decided to sell off a subsidiary that is responsible for holding legacy product liability claims relating to coal dust, asbestos, silica, and other exposures. The subsidiary in question does include insurance and deferred tax assets. Unlike most divestitures, this one actually required MSA Safety to pay to unload the assets. This number came out to $341 million. It does not appear, based on any of the data provided, that this transaction will negatively impact bottom line results with the exception of requiring some additional interest payment on the debt assumed as part of the maneuver.
Taking this into consideration, I then value the company based on results from both 2021 and 2022. when it comes to the price-to-earnings approach, I decided to use the adjusted figures provided by management instead of the GAAP figures. This gave me a price-to-earnings multiple, on a forward basis, of 23.6. That compares nicely against the 28.4 reading that we get using data from one year earlier. On a price to adjusted operating cash flow basis, the firm is trading at a multiple of 20.5. This is up only slightly from the 20.4 reading that we get using data from 2021. Finally, using the EV to EBITDA approach, the multiple came in at 17.8. That stacks up against the 21 reading that we get using data from 2021. Normally, I would have liked to see what the future might hold for the business. But the only real guidance that management provided on this front is that they are focused on delivering sales growth in 2023 in the mid-single digits. Beyond that, they have not provided any details on what to anticipate. I also normally would have liked to compare the company to similar businesses. But given just how niche this space is, this appears impractical.
Takeaway
Based on the data provided, it seems to me as though MSA Safety is continuing to grow nicely. Unfortunately, bottom line results have been somewhat mixed, even from a cash flow perspective. In the long run, I do think that the company would do just fine for itself and its investors. But that doesn't necessarily mean that shares should outperform the broader market. In fact, because of how the stock is priced at the moment, I would say that it should, at best, perform along the lines of what the market will go on to achieve. And because of that, I cannot help but to rate it a 'hold' still.
For further details see:
MSA Safety Continues Growing, But It's Still Not A Great Play