Mine Safety Appliances (MSA): An Opportunistic Play With a Potential 30% Upside

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In the 10 Stock Picks for 2013, Jim Cramer was quite bullish on Mine Safety Appliances (NYSE:MSA), a supplier of safety products in the fire service, homeland security, and oil/gas industries. He thought that the company was a potential target for big companies that were interested in the safety equipment industry. Jim Cramer believed that Mine Safety could easily be acquired at around $60 per share, a 20% upside from its current trading price of $49.70 per share. Could Mine Safety be worth $60? Let’s see.

Mine Safety Appliances (NYSE:MSA)Business Snapshot

Mine Safety, founded in 1914, is a global maker of safety products in different industries including oil/gas, fire service, construction, mining, and manufacturing. The company has three main geographical segments: North America, Europe, and International. The majority of its revenue, $561.1 million, or 48% of the total revenue, was generated from the North America region. The second biggest revenue source was the International segment with $325.3 million in sales, while Europe contributed nearly $287 million in revenue in 2011. Its customers were divided into three main categories: industrial and military end-users, distributors, and retail consumers. In the US, US military customers accounted for around 5% of its total sales. In the operation, Mine Safety employed a reasonable amount of leverage. As of September 2012, it had $484 million in total stockholders’ equity, $74 million in cash, and $305 million in debt. However, it recorded a quite huge amount of goodwill of $257 million in the balance sheet. This amount of goodwill might be quite vulnerable to impairment charges that could negatively affect the company’s earnings in the near future.

Two Previous Buyouts

Jim Cramer mentioned that DuPont and Honeywell International Inc. (NYSE:HON) could be Mine Safety’s potential acquirers. He said: “Both Honeywell and DuPont want to add to their safety offerings, and they can both afford to pay up, although I see Honeywell as the more likely suitor. Plus, with a market cap of just $1.5 billion, Mine Safety is small enough to be easily digested by either of these giants.” In 2010, Honeywell purchased Mine Safety’s competitor, Sperian Protection, for around $1.4 billion. With well-recognized brands with a strong global distribution channel, the acquisition has strengthened Honeywell’s position in the high growth Personal Protective Equipment industry (PPE). At that time, the deal has valued Sperian Protection at around 13.5x EBITDA 2009. Recently, 3M Co (NYSE:MMM) has also paid $860 million to acquire Ceradyne, a worldwide leading manufacturer of advanced technical ceramic products for defense, industrial and other commercial applications. Many people thought that 3M had overpaid Ceradyne as an $860 million offer valued Ceradyne at 30x next year’s earnings. However, in terms of EV multiples, the deal didn’t seem to be expensive anymore with around 6x EV/EBITDA.

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