In recent AlphaNow articles, we have discussed the plight of resource companies that have invested heavily in new energy or mining operations only to find that the high commodity prices on which the economics of these projects were based have fallen sharply. That’s bad news for earnings at mining companies or oil and gas exploration production businesses, at least temporarily, but not for their suppliers. For instance, all those new mines opening up means that, regardless of the price of copper, the mining company will need to invest in new safety equipment. And that is great news for the bottom line of Mine Safety Appliances (MSA.N), which makes breathing equipment, helmet lines and other products for workers in both the energy and mining sectors. In the first quarter of 2012, Mine Safety announced record revenues and earnings, and it may do even better this quarter. The company has a Predicted Surprise of 3.3%, signaling that those earnings are likely to continue, possibly beating the consensus estimate provided by analysts when the company reports second-quarter earnings in late July.
In the first quarter, Mine Safety’s net income hit $24 million — its highest level on record. As seen in the chart below, cash flow from operations (CFFO) of $33 million handily exceeded the company’s net income, an encouraging sign for future earnings. In the fourth quarter of 2011-, CFFO was even higher, setting a record of $47 million. Meanwhile, Mine Safety’s operating profit margins also have been on the rise, as seen by the blue line in the chart on the right, below. In the first quarter, these margins reached 12%, above the industry median of 11% (represented by the gold line in the chart below). Management plans to raise operating profit margins — an indication of strong operating efficiency — still more, setting a target for them of 15% by 2015.
Analysts seem to have picked up on the company’s strong performance and have responded by raising their earnings estimates for the stock in the last 90 days. In the chart below, the blue line represents the SmartEstimate, while the gold line represents the I/B/E/S consensus forecast. Today, the SmartEstimate stands at 68 cents per share, 2 cents above the consensus estimate, while both estimates are higher than they were 90 days ago. Offering additional encouragement is the fact that a five-star analyst has recently published earnings estimates that are significantly higher than that consensus. Together, those signals lead the StarMine research team to believe that the company will beat estimates when it reports earnings next month.
Despite the company’s name, the oil and gas industry is actually Mine Safety’s single largest customer, generating more than 30% of the company’s revenues. Accordingly, it stands to benefit from the well-documented surge in capital spending by these companies over the course of the last two years, providing safety equipment to workers involved in work exploring for and producing new supplies of crude oil and natural gas. The company also produces fire safety equipment, a business that accounts for another 25% of revenues; now that home construction showing signs of reviving, William Lambert, the company’s CEO, says he expects this segment to be a strong contributor to the company’s performance.
Mine Safety isn’t just talking the talk, either. In mid-May, it announced it would boost its quarterly dividend from 26 cents a share to 28 cents a share. -. That’s likely to make it an appealing stock in the eyes of investors looking for income; its other fundamental characteristics make it likely that it will be popping up on the screens of money managers, according the StarMine SmartHoldings (SH) model. This model reverse engineers the holdings of institutional investors to determine what fundamental characteristics they value most greatly. Mine Safety scores 97 on a scale of 1 to 100 on this model, signaling that it’s likely to be particularly alluring to this group of investors. While some mining and energy companies may be regretting having plowed so much of their capital into big new projects at the time they did, one element that they can’t skimp on is worker safety — and that’s good news for MSA. When it reports its second-quarter results July 25, it appears likely that will be reflected in yet another positive earnings surprise for investors to celebrate.
