Mine Safety Appliances (MSA)
Section I
a)
Description of the Firm’s Business Lines
Mine Safety Appliances Company was founded in 1914 and has headquarters in
Cranberry Township, PA. MSA manufactures and sells products designed to protect the
safety and health of workers worldwide. Company’s products include respiratory
protective equipment and instruments that monitor and analyze workplace environments
and control industrial processes. The company provides safety products against all
hazardous or life threating situations that a worker may face. Currently, MSA’s market
cap is about $1.18 Billion and employs about 5,300 workers. They are present in three
main business segments, which are as follows: North America, Europe, and International.
Due to their global appearance they have Research and Development centers located in
the United States, Germany, France, Brazil, Sweden, and China along with
manufacturing centers in other countries such as Mexico, Ireland, Morocco, Chile, South
Africa and Australia. In eight of the past ten years, MSA has achieved record growth
numbers with annual revenues of over $1 Billion. Their focus is protecting the health and
safety of their customers; an organization “built on integrity”.
b)
Geographic Analysis: Revenues
Report Date
Currency
Scale
North America
Europe
International
Total
12/31/2013
USD
Thousands
559,193
289,760
263,105
1,112,058
Based on the data above, MSA’s revenue is generated mostly through the North
American market. However, both Europe and other International countries make up about
half of the remaining revenue each accordingly. This proves that although North America
is the main source of income and target for the company, domestic sales are not the only
factor. Growth in the European and international countries could result in higher earnings
and increased market share for MSA in the future.
c)
Macro Economic Analysis of United States
According to Bloomberg 65.54 % of Mine Safety Appliances net income comes
from domestic markets here in North America. The remainder comes from the
International and European Markets, respectively. The bulk of MSA’s business comes
from the domestic market, thus a macroeconomic analysis of the United States will help
us determine trends that may affect our business.
The GDP of the United States seems to have stabilized and increased from the
previous years. In 2009 the GDP was 13,973.7 trillion, which had decreased 2.2% from
the previous year. From 2010 and on, the U.S. had positive growth in GDP amounting to
about 4% each year. By 2012 the GDP was 15,681.5 trillion. This shows how the United
States is in a state of recovery from the recent recession.
The unemployment rate in the past few years has been at a steady decline since
the recession. In 2010 it hit a peak at 9.6% but has decreased to 8.1% by 2012. The
unemployment rate can be considered a lag on the efficiency of the economy so
minimizing that number it is in the best interest of the United States. Being in a state of
recovery, the government has attempted to create jobs, but it has yet to be controlled to
pre-recession standards of about 4%.
The U.S.’s interest rate has been at a steady .25% since 2009. This makes
borrowing much more appealing to the consumer and allows for immediate spending.
Also inflation rates in the United States stabilized from -0.4% in 2009 to 2.1% in 2012. A
steady rate of inflation shows a healthy economy, however too much inflation can cause
problems. It can cause uncertainty and risk or it can cause consumers to resort to buying
imports rather than domestic products.
In terms of fiscal policy, the United States is in a state of recovery from the recent
recession. The U.S. government has taken several steps to ensure economic growth. The
national debt is a large concern. Government spending has been reduced and new
revenues are to be acquired. Tax relief for taxpayers has also been a large issue. The
American Taxpayer Relief Act (ATRA) was enacted in 2013, which extended income tax
cuts for ninety-eight percent of taxpayers. The Recovery and Reinvestment Act has also
provided assistance through tax relief and college expense assistance. These laws are
meant to provide much needed help to the middle class. The Affordable Care Act (ACA)
also helps to provide medical services to those that cannot afford it. The United States is
attempting to strengthen its economy from the bottom up. With a much more stable lower
and middle class, new businesses can start and other businesses can flourish.
Through the aspects of the macro economic analysis we can conclude that the
United States is experiencing a period of recovery and preparation for the future. In the
recent recession of 2008, the domestic economy fell drastically and the United States
government has taken steps in an attempt to assist its citizens and its economy. The
statistics indicate that the worst part of the recession is over and stability is a priority in
years to come.
GDP: 2009:13,973.7 Trillion -2.2% change
2010:14,498.9 Trillion 3.8% growth
2011:15,075.7 4.0% growth
2012:15,681.5 4.0% growth
Budget Deficit: 2009: -1412.7
2010: -1,294.4
2011: -1299.6
2012: -1210.7
2013: -990.6
Unemployment Rate: 2009:9.3
2010:9.6
2011:8.9
2012:8.1
Inflation Rate: 2009: -0.4%
2010: 1.6%
2011:3.2
2012:2.1
2013:1.5
Interest Rate: 2009-2012: .25%
Macro Economic Analysis of International Markets
A large portion of the remainder of Mine Safety Appliance’s net income comes
from Europe. Europe’s economy is currently in a state of growth and recovery. Many
countries were greatly affected by the recent recession. However, presently the global
economic cycle is improving. There is predicted growth in developed countries in the
upcoming years. The UK’s GDP in 2013 was 1.8% and also revealed a balanced growth
pattern.
There had been many policy uncertainties in the past years but many of those
problems have been solved although some risks remain. The unemployment rate of
Europe remains just above 7% while the inflation rate eased to 1.9%. Interest rates also
remain at .50%, which is only a little above the US’s. The UK is still however vulnerable
to financial fragmentation and deflation or slowed inflation.
The European economy has been under great stress since the recession in 2009.
Since then, many countries in the Eurozone have been in a state of recovery and more
recently growth. This new growth also brings risk, making their economy fragile but with
a positive outlook.
d)
Industry Outlook
Mine Safety Appliances falls into several industries one of the more prominent
being Office/Medical Equipment and Supplies. Large Companies are always willing to
pay for quality equipment so their employees can perform their jobs safely and
effectively, but such goods don’t need to be purchased frequently so the industry doesn’t
have huge short-term growth expectations. The Office/Medical Equipment and Supplies
industry does not have great expectation for large growth in the near future, but the three
to five year forecast shows great potential for optimal growth. The sector doesn’t have
larger amounts of business in the international markets so there are other avenues of
growth. The driving factor behind the success of office equipment and supplies industry
relies on the strength of the economy. Mine Safety Appliances has potential for serious
improvements in revenues and market share because the company is a large player in the
industry. It is expected to have an increase in demand as the economy strengthens due to
many companies wanting to replace their current, aging equipment.
e)
Firm Position
Our position as a firm in the industry of medical equipment and office equipment,
MSA is not considered a top tier competitor although MSA considers themselves at the
forefront of safety equipment technology. Thomson Reuters, MarketEdge, and Smart
Consensus have our company rating at neutral/hold. This in return makes potential for
growth immense. After doing research through the Bloomberg Terminal as well as
MSA’s annual report, we were able to come to the conclusion that our firm is not
considered a medical equipment or office equipment leader but has great potential.
Based off of Stock Reports+ detailed stock report, we have found that MSA
currently has a Fundamental Rating of 7. The average Fundamental Rating for its
Business Support Supplies Industry is 6.3 and the S&P COMPOSITE average is 6.7. In
addition, municipal fire markets should continue to slowly improve. However, in Walter
S. Liptak’s report for Barrington Research on Mine Safety Appliances Co., we have also
found that MSA has several potential investment risks. A major risk caused by the
company being organized into three geographic operating segments (North America,
Europe, and International), future cash flow is impacted by the overall health of the
industrial economy and spending for the company’s industrial products. Another risk is
short-term investment due to macroeconomic risks and the high mix of international sales
including 24% Europe mix. The report also states that raw material costs have been
increasing and the company has a strategy to increase selling prices to pass along raw
material costs. This is a huge risk because it could makes it possible that the company be
unsuccessful passing along future price increases due to competitive pricing within its
various market sectors. The company would have to plan to continue to grow through
execution of a corporate strategy; however this also does not guarantee that the company
will be successful. Liptak also says, “We believe that MSA’s management is doing a
good job offsetting Western Europe sales decline with sales growth in Eastern Europe,
and shifting to indirect channels of distribution. This would improve MSA long term
Europe Profitability.” MSA’s strategic restructuring, channel strategy, cost management
and price initiatives, should improve 2013-2014 profitability.
After reviewing the 2012 annual report given by MSA, I can support our position
as a firm in the industry with great potential for growth. With a 30 percent year-over-year
improvement in profitability, 2012 marked the most profitable year in company history.
MSA operates several sophisticated research and development facilities. MSA’s
dedication and commitment to innovation and research and development allow them to
produce innovative safety products that are often first to market and exceed industry
standards. MSA has expanded their manufacturing operations and added depth to their
engineering resources in places like Brazil and China. Also in Brazil, MSA recently
initiated “Projeto Real,” a multi-year investment and growth strategy that aims to double
their sales and operating income in the world’s fifth most populated country. However
MSA is subject to risks arising from adverse changes in global economic conditions.
Although economic conditions generally improved in 2012, the global economy remains
unstable and they expect economic conditions will continue to be challenging for the
foreseeable future. Adverse changes in economic conditions could result in declines in
revenue, profitability and cash flow due to reduced orders, payment delays, supply chain
disruptions or other factors caused by the economic challenges faced by their customers
and suppliers. This makes this a high-risk investment that is relied mostly on government
spending. A reduction in the spending patterns of government agencies could materially
and adversely affect their net sales, earnings and cash flow.
Comparison to closest competitors:
Size: $20 billion+ market
1. USTR: $5.09 billion sales
2. PBI: $3.87 billion sales
3. MSA: $1.2 billion sales
4. GB: $646.2 million
Net Income:
1. USTR: $109 million (2010), $111.83 million (2011), $123.17 million (2012)
2. PBI: $351.32 million (2010), $435.93 million (2011), $301.73 million (2012)
3. MSA: $38.1 million (2010), $69.9 million (2011), $90.6 million (2012)
4. GB: $33.1 million (2010), $33.1 million (2011), $-4.8 million (2012)
Expansion:
MSA: Growth
5 Year Annual Growth (%)
-1.30
5 Year Annual Dividend Growth Rate (%)
4.65
5 Year Annual Revenue Growth Rate (%)
-0.49
5 Year EPS Growth
2.90
MSA is driving this growth by leveraging the breadth of MSA’s global channels
of distribution, establishing new distribution channels and capitalizing on opportunities in
the energy market as the oil, gas and petrochemical industries returned solidly to a
growth trajectory MSA’s long-term strategy is to drive MSA’s growth and penetration in
Emerging Markets, especially in highly populated regions with growing economies such
as Asia, Mexico and Latin America. MSA’s goal is simple and straightforward: to be
well-positioned in Emerging Markets with Core Products that meet the growing demand
for safety products and drive growth at MSA for years to come. We believe MSA’s sales
and distribution strategy allows them to deliver a customer value proposition that
differentiates MSA’s products and services from those of MSA’s competitors, resulting
in increased customer loyalty and demand. MSA believes the worldwide personal
protection equipment market, including the sophisticated safety products market in which
they compete, generates annual sales in excess of $20 billion.
f)
Firm’s Economic Advantages
Based on our current industry position, we need to take advantage of the industrial
trends that are currently evolving. MSA wants to be in position to win over any emerging
markets with the mix of core products that they offer. In sight of this, MSA has decided
to attempt to broaden their core product mix to lower dependence on military and fire
markets. This allows MSA as an organization to focus on the protection and health of all
workers worldwide, rather than a niche group such as the military market.
MSA’s business relations involve their group of suppliers and their variety of
groups of customers. According to Bloomberg, MSA’s suppliers are FLIR Systems,
Luxfer Group, Adobe Systems Incorporated, and NetApp Incorporated. MSA’s main
customers are Airgas Incorporated, Fastenal Company, and Home Depot Incorporated.
The relations with these companies have resulted in a supply chain where MSA receives
raw materials from their suppliers, usually at a bulk price, and then convert the materials
into goods for their customers. Then their customers buy inventory from MSA based on
their needs as a company. Obviously, Home Depot focuses on more standardized goods
than say Airgas Company, who regularly purchases specialized products for protection
from hazardous gases and chemicals. Fastenal buys a large variety of safety items ranging
from strictly hand and eye protection, to full body garments and even fall protection
when working at large heights.
The constant innovations that are applied to all products made by the organization
have resulted in new products being born. Recently, the company has introduced
respiratory protection products to fight against all negative effects of gases, chemicals
and contaminants as well as gas detection instruments to detect the presence of dangerous
gases in the air. Thermal imaging cameras have been introduced and upgraded for the fire
service market, allowing firefighters to detect sources of heat and therefore find people
that are still inside of burning or smoke filled buildings.
Recently, MSA has been issued a US Patent for “Protective enclosure for use with
a sensor for detecting an analyte.” The patent was filed on July 26, 2011 and was finally
issued on March 4th.
g)
As Reported
Report Date
Currency
Audit Status
Annual Balance Sheet
12/31/2012
USD
Not
Qualified
12/31/2011
USD
Not
Qualified
12/31/2010
USD
Not
Qualified
Consolidated
Scale
Cash & cash equivalents
Trade receivables, gross
Less allowance for doubtful accounts
Trade receivables, net
Finished products
Work in process
Raw materials & supplies
Inventories
Deferred tax assets
Income taxes receivable
Prepaid expenses & other current assets
Total current assets
Land
Buildings
Machinery & equipment
Construction in progress
Property, plant & equipment, gross
Less accumulated depreciation
Property, plant & equipment, net
Prepaid pension cost
Deferred tax assets
Goodwill
Intangible assets
Other noncurrrent assets
Total assets
Notes payable & current portion of long-term
debt
Accounts payable
Employees' compensation
Insurance & product liability
Taxes on income
Other current liabilities
Total current liabilities
Industrial development debt issues payable
Senior notes payable
Senior revolving credit facility
Long-term debt, including current portion
Less: amounts due within one year
Long-term debt
Pensions & other employee benefits
Yes
Thousands
96,265
207,670
7,306
200,364
74,466
8,108
54,263
136,837
22,458
9,181
35,861
500,966
3,835
110,534
349,667
16,364
480,400
327,645
152,755
121,054
14,996
260,134
35,029
149,336
1,234,270
Yes
Thousands
82,718
198,691
7,402
191,289
72,658
13,473
50,169
136,300
17,727
6,342
29,172
463,548
5,267
107,082
334,951
10,444
457,744
310,279
147,465
42,818
17,018
258,400
182,497
1,111,746
Yes
Thousands
59,938
199,670
7,043
192,627
65,687
17,000
58,788
141,475
21,744
13,769
29,296
458,849
5,142
104,575
333,846
13,472
457,035
311,272
145,763
58,075
12,065
259,084
181,216
1,115,052
7,500
6,823
8,263
66,902
38,164
14,251
3,662
61,085
191,564
4,000
153,334
110,000
267,334
6,667
260,667
152,084
59,519
41,602
15,025
4,389
61,442
188,800
4,000
160,000
115,000
279,000
6,667
272,333
151,536
50,208
38,400
15,738
3,051
56,110
171,770
4,000
168,046
170,000
342,046
8,000
334,046
124,310
Deferred tax liabilities
Other noncurrent liabilities
Total liabilities
Preferred stock, 4 1/2% cumulative
Common stock
Stock compensation trust
Treasury shares, at cost
Cumulative translation adjustments
Pension & post-retirement plan adjustments
Accumulated other comprehensive income
(loss)
Retained earnings
Total Mine Safety Appliances Company
shareholders' equity
Noncontrolling interests
Total shareholders' equity
49,621
7,987
661,923
3,569
132,055
(1,585)
281,524
(1,189)
(77,080)
17,249
11,124
641,042
3,569
112,135
(3,891)
269,739
4,959
(132,031)
30,458
15,057
675,641
3,569
97,276
(6,070)
266,231
829
(104,013)
(78,269)
(127,072)
(103,184)
792,206
747,953
708,306
566,452
462,955
433,666
5,895
572,347
7,749
470,704
5,745
439,411
12/31/2012
USD
Not
Qualified
Yes
Thousands
1,168,904
1,525
8,396
4,790
(4,272)
552
10,991
1,179,895
666,172
321,234
40,900
2,787
11,361
(3,151)
1,045,605
67,041
12/31/2011
USD
Not
Qualified
Yes
Thousands
1,173,227
1,861
3,328
192
5,381
1,178,608
702,991
306,367
39,245
8,559
14,117
(2,511)
1,073,790
58,817
As Reported Annual Income Statement
Report Date
Currency
Audit Status
Consolidated
Scale
Net sales
Interest income
Land impairment loss
Gain on asset dispositions, net
Escrow settlement
Intangible asset impairment loss
Other income, net
Total other income
Total revenues
Cost of products sold
Selling, general & administrative expenses
Research & development expenses
Restructuring & other charges
Interest expenses
Currency exchange gains (losses)
Total costs & expenses
Income before income taxes - U.S.
12/31/2013
USD
Not
Qualified
Yes
Thousands
1,112,058
1,142
(1,557)
436
(196)
(175)
1,111,883
615,213
309,206
45,858
5,344
10,677
(5,452)
991,750
48,621
Income before income taxes - non-U.S.
Income from continuing operations before
income taxes
Current provision for income taxes - federal
Current provision for income taxes - state
Current provision for income taxes - non-U.S.
Total current provision for income taxes
Deferred provision (benefit) for income taxes federal
Deferred provision (benefit) for income taxes state
Deferred provision (benefit) for income taxes non-U.S.
Total deferred provision (benefit) for income
taxes
Provision for income taxes
Income from continuing operations
Income from discontinued operations
Net income
Net income (loss) attributable to noncontrolling
interests
Net income attributable to Mine Safety
Appliances Company
Weighted average shares outstanding - basic
Weighted average shares outstanding - diluted
Year end shares outstanding
Earnings (loss) per share from continuing
operations - basic
Earnings (loss) per share from discontinued
operations - basic
Net earnings (loss) per share - basic
Earnings (loss) per share from continuing
operations - diluted
Earnings (loss) per share from discontinued
operations - diluted
Net earnings (loss) per share - diluted
Dividends paid per common share
Total number of employees
Total number of shareholders
71,512
67,249
46,001
120,133
134,290
104,818
18,656
1,492
18,453
38,601
18,774
2,556
20,986
42,316
6,829
872
18,272
25,973
(3,582)
(518)
10,853
(483)
(125)
772
609
856
(2,825)
(3,456)
213
8,800
35,145
84,988
3,061
88,049
42,529
91,761
34,773
70,045
198
(1,124)
(193)
88,247
90,637
69,852
36,868
37,450
37,202.099
36,564
37,042
37,007.799
36,221
36,831
36,692.59
2.31
-
-
0.06
-
-
2.37
2.45
1.91
2.28
-
-
0.06
-
-
2.34
1.18
5,000
502
2.42
1.38
5,300
324
1.87
1.03
5,300
452
As Reported Annual Cash Flow Statement
Report Date
Currency
12/31/2013
USD
Not
Qualified
Yes
Thousands
88,049
30,764
12,268
12/31/2012
USD
Not
Qualified
Yes
Thousands
91,761
31,702
3,673
12/31/2011
USD
Not
Qualified
Yes
Thousands
70,045
32,866
(4,967)
(436)
(8,396)
(2,840)
10,337
(3,234)
(18,162)
5,127
(2,246)
4,386
10,010
213
(14,104)
3,151
(2,799)
1,103
7,732
8,800
(24,130)
2,511
(1,823)
126,853
116,314
88,194
(13,171)
(6,296)
10,732
2,346
2,677
17,776
(217)
(1,230)
(1,030)
(7,337)
11,363
(459)
(16,072)
110,781
(36,517)
1,360
-
34,162
150,476
(32,209)
20,193
(2,936)
85,258
(30,390)
18,687
-
(5,269)
-
(35,157)
(17,285)
(11,703)
Proceeds from (payments on) short-term debt, net 662
(128)
137
Payments on long-term debt
Proceeds from long-term debt
Restricted cash
Cash dividends paid
Distributions to noncontrolling interests
(246,500)
183,500
(50,990)
-
(199,000)
164,000
(37,741)
-
Audit Status
Consolidated
Scale
Net income
Depreciation & amortization
Pensions
Net loss (gain) from investing activities - asset
disposals
Stock-based compensation
Deferred income tax provision (benefit)
Other noncurrent assets & liabilities
Currency exchange losses (gains)
Excess tax benefit related to stock plans
Other adjustment to operating activities, net
Operating cash flow before changes in working
capital
Trade receivables
Inventories
Accounts payable & accrued liabilities
Income taxes receivable, prepaid expenses & other
current assets
Decrease (increase) in working capital
Net cash flows from operating activities
Capital expenditures
Property disposals
Disposal of assets
Acquisitions, net of cash acquired & other
investing
Net cash flows from investing activities
(306,766)
295,100
(2,790)
(43,994)
(556)
Company stock purchases
Exercise of stock options
Excess tax benefit (provision) related to stock
plans
Net cash flows from financing activities
Effect of exchange rate changes on cash & cash
equivalents
Increase (decrease) in cash & cash equivalents
Beginning cash & cash equivalents
Ending cash & cash equivalents
Interest payments
Income tax payments
(11,785)
9,643
(3,508)
4,306
(624)
1,316
2,246
2,799
632
(58,240)
(110,521)
(71,280)
(3,837)
110
(2,097)
13,547
82,718
96,265
10,884
36,242
22,780
59,938
82,718
10,772
29,807
178
59,760
59,938
13,969
21,739
Section II
a)
Documenting Risk-free Rate
For our valuation models we used the Bloomberg terminal to determine the
market Risk-free rate. The Risk-free rate is specific to the country or region being
analyzed. We found that on the date of March 26th, 2014 the Risk-free rate for the U.S.
market was 2.692%. This represents the yield of the ten-year treasury security.
b)
Documenting Market Risk Premium
The Bloomberg terminal not only allowed us to find the Risk-free rate of the
market, but also the Market Risk Premium. The Market Risk Premium represents the
difference between the expected market return and the Risk-free rate. The expected market
return is the implied return expected from the market using forecasted growth, earnings,
dividends, and current values. To calculate the Market Risk Premium, we took the
10.090%, expected market return and subtracted 2.692%, the risk-free rate from it. The
Market Risk Premium was found on March 26th, 2014 as well, and we determined that this
rate was 7.398%.
c)
Documenting Required Rate of Return
The required rate of return for our company was determined using the Risk-free
rate, Market Risk Premium, and our company’s Beta. MSA’s Beta, 1.135, was also found
through the company’s profile on the Bloomberg terminal. To calculate our company’s
required rate of return, or “k”, we added the Risk-free rate of 2.692% to the product of
multiplying our company’s Beta, 1.135, with the Market Risk Premium, 7.398%. The result
of this calculation showed that MSA’s required return was 11.089%.
d)
Justifying the Growth Rate Assumptions
Based on our firm, we found, via Bloomberg, that our company has an estimated
seventeen years until it reaches maturity. Because of this, we have an assumed long-term
growth rate of 19.05% for seven years of constant growth. MSA has received record
growth in the past 8 of 10 years although much of it was during a recession. With the
domestic and International markets becoming more stable, we expect high growth
prospects in the coming years. Our firm has invested in steps to prolong customer
satisfaction and provide high growth for the future. (Krause, 2014) Such as innovation,
product enhancements, employee development, and capital improvements. After our
company has gained its maximum benefits from these investments we expect to begin the
transition period in our life cycle. Our growth rates will begin to drop until year
seventeen when it maintains a 6.061% growth rate forever because we have made a mark
in the industry based on our quality and integrity. Bloomberg also allowed us to compare
our price-earnings ratio to that of the market and our ratio was always above one, with a
four-year average of 1.32, concluding that our earnings would be higher than that of the
average on the market. We found on March 26th, that our P/E ratio was 17.09. The longterm growth rate, growth rate at maturity, and P/E ratio were our assumptions that we
used in our valuation models.
e)
Dividend Discount Model
In the Dividend Discount Model, MSA has a constant seven-year growth rate at
19.05% with a future growth rate stabilizing ten years later at 6.061%. According to the
Bloomberg Terminals information under “Dividend Discount Model”, these rates were
given. Years eight through sixteen were designated as our transition years from our longterm growth to our growth rate at maturity. To calculate these years we used the prior
years growth percentage, starting at year seven (19.05%) and subtracted from that the
difference between the constant growth rate and the growth rate at maturity, which was
12.989%. From here, we divided the 12.989% by ten, to represent the years of
depreciating growth. These steps allowed us to find the difference of depreciating growth
per year, which resulted in 1.299%. Over the ten years of transition period, our long-term
growth rate of 19.05% decreased to 6.061%, our growth rate at maturity.
This decrease in growth rate affects the dividends that we receive. We calculated
the dividends by using the prior years dividend, and multiplying that by the sum of
adding one to the current years growth rate. This results in increasing dividends that
change based on the growth percentage of that year from years eight to sixteen. The
dividends maintained constant growth from years one to seven and after year sixteen.
This data allowed us to find the Terminal Value of our company in year sixteen of
$227.10. This value represents what our firm would be worth at year sixteen, not at
today’s value. Due to this we then had to compute all of the dividends as a present value
by taking the future value of the dividend and discounting it, by dividing one plus the
discount rate, k, and then raising that to the power of that specific year. We also had to
find the present value of the terminal value we had calculated by taking the future value,
$227.10, and discounting it by dividing it by one plus the discount rate, and then raising it
to the power of sixteen, the last year of it’s transitional growth. The present value came
out to be $42.22. To find the intrinsic value, or estimated current value, we add the
$42.22 to the sum of the present values of our dividends, which resulted in an intrinsic
value of $70.98. Based on this valuation of our stock, currently MSA is undervalued at
$56.00.
Our intrinsic value is very reactive to that of our assumptions. If we were to only
assume a long-term growth rate of 15% for the first seven years until transition, our
intrinsic value would drop to below the current price of MSA, down to $50.03. The same
would occur if our constant growth rate at maturity dropped to 3.5%, resulting in our
intrinsic value at $52.58. This would completely change the outlook on investing in our
firm, and we would conclude that MSA is overvalued if either of these growth rates were
true.
F) Comparison of P/E Methods
MSA P/E compared to the Market P/E
In this method we compared Mine Safety Appliances’ Price-earnings ratio to that
of the market’s. To valuate this stock we first obtained the S&P P/E ratios for the last
four years. We then used Bloomberg to get the P/E ratios for MSA for those same years
and compared them back to the market P/E. We calculated the relationship between the
market P/E and MSA’s P/E by creating a ratio for each year. We then computed the
average ratio to help determine the expected P/E for today. To do this we multiplied the
average ratio by the market’s P/E for today. Then for the last step, to get the intrinsic
value, we multiplied this expected P/E by the earnings per share. This came out to 63.94,
which is above the current market value of the stock. This means that Mine Safety
Appliances is worth more than it is valued at.
Year
S&P P/E
MSA P/E
Ratio
2013
17.03
20.77
1.22
2012
14.13
18.68
1.32
2011
12.76
16.20
1.27
2010
15.09
21.95
1.45
Average
Today
17.09
Expected P/E
22.50
EPS
2.842
Vo=
63.94
MSA’s P/E compared to Market Regression
The next method we used was the comparison of MSA’s P/E ratio to the market
regression. Our group first found the coefficients from Damodaran Online’s updated
“Market Regression Against Fundamentals”. The Price Earnings equation for regression
1.32
= 4.20 + (149.0*gEPS) + (13.40*Payout) – (2.86*Beta). Our group then found the MSA
factors from the Bloomberg terminal. These factors are; expected growth rate in EPS for
next 5 years, payout ratio, and Beta. Our group multiplied the coefficients by the MSA
factors and then added the results together which gave us our expected price earnings
ratio of $35.57. Our group then multiplied the expected price earnings ratio of $35.57 by
MSA’s earnings per share of $2.842. The product of expected price earnings ratio and
MSA’s earnings per share is $100.517, which represents the intrinsic value.
Coefficients
MSA Factors
4.2
149
13.4
-2.86
Totals
4.2
28.3845
6.03
-3.2461
0.1905
0.45
1.135
35.37
2.842
100.517
Expected Price/Earnings
Earnings per share
Vo=
MSA’s P/E compared to Industry Average
In the next valuation we compared Mine Safety Appliances P/E to the industry
average P/E. In this valuation we multiplied the EPS we calculated in the first valuation
method by the industry average P/E to get the
intrinsic value of the firm. This valuation is
Avg. P/E Industry
24.58
EPS
2.842
Vo=
69.86
based on the industry’s performance. If MSA can
perform as well as the average company within
its industry, it will be valued at 69.86.
MSA’s PEG compared to Industry Average
In this method we compared MSA’s PEG with the average PEG in the industry.
We started off by getting our industry average price/earnings growth ratio of 1.57 and our
expected growth percentage of 19.05%. Then we multiplied the industry average PEG
and our growth percentage to calculate MSA’s expected price/earnings ratio of 29.9085.
The Earnings per Share is given for MSA at 2.842.
With these we can calculate the intrinsic value (Vo) for
Average PEG
(Ind)
Growth (MSA)
1.57
Exp P/E
29.9085
EPS
2.842
Vo=
84.99996
19.05
MSA, which came out to 84.99996.
Section III
a)
Over / Under-valued & Estimated Return Percentage
To finalize the best estimate of MSA’s current intrinsic value, we decided to take
the average of the most relevant intrinsic values from the P/E and DDM methods. We left
out the intrinsic value found using the P/E compared to market regression, 100.517, and
the average found using the Industry PEG, 84.99, because they were major outliers
compared to the other P/E methods and the DDM. We found the average of the intrinsic
values compared to market P/E ($63.94), industry average ($69.86), and the Dividend
Discount Model ($70.98) to be $68.26. This is our best estimate of the intrinsic value,
and our firm is definitely undervalued compared to its current price of $51.65. This
shows that investors should be expecting growth in the future if they were to currently
invest in MSA.
A positive return on your investment would be expected due to the undervalued
firm value and the expected growth potential of MSA of around 32%. This estimate is
found by taking the estimated intrinsic value, $68.26 and dividing that by the current
price of $51.65. In a short-term, three-month period, you would be able to expect a
positive return percentage of between 8-10%. This is due to the fact that MSA is
currently outperforming the average on the market and has maximum potential of growth
in its current phase. This return will increase overtime as the market begins to correct the
value of the firm. When investing in MSA for a year, MSA has potential to gain between
17-20% if traded correctly. This means that when following the moving average of the
firm, if you were to buy, hold, and sell at the correct point on the moving average, you
would be able to maximize your expected return. This increase over the year is following
the trend of increasing return until MSA reaches maturity at 32.16%. Over the past year,
MSA has seen an increase in stock price from the mid-40s all the way up to just under
$60 at its maximum price. As of right now, MSA is listed at just above $50, and is
expected to reach $60.33 as a one-year estimate. This continues to show an upward trend
in stock price, and great potential for positive earnings in the firm. The under-valued
stock price of MSA seems to be a temporary aspect due to the specific characteristics of
the firm. MSA falls under a niche market segment and has a high-risk, high-reward
characteristic. The current Beta of MSA is 1.51, supporting the fact that it has much
higher risk than the average of the market, but potential for maximum growth.
b)
Alternative Investment Option
An alternative investment option in the medical equipment and office equipment
industry is Greatbatch,Inc (GB). Greatbatch, Inc. is engaged in medical solutions
businesses. The three month return for GB is a positive 15.01% which outperforms the
S&P 500 by 7.62%. MSA has a positive three-month return of 8.83%, which also
outperformed the S&P 500. Both GB and MSA are very similar in size and have similar
statistics, making them great to compare. GB is an alternative investment because it has a
higher Price Earnings Ratio as well as a Price Earnings Growth Ratio (5 yr expected) of
1.66 compared to MSA’s PEG of 1.25. This suggests that investors are expecting higher
earnings growth in the future. Another measure to show how GB may be an alternative
investment option is earnings per share. Although MSA has a higher earnings per share,
GB has an annual earnings per share estimate of 2.33 which is 0.02 higher than MSA’s
2.31. GB also has a higher beta than of MSA. This shows that this company is risky but
also very rewarding, which is why Greatbatch, Inc. could be an alternative investment
option in the medical and office equipment industry. We found the intrinsic values of
Greatbatch, Inc. and took the average of the most relevant values. The outlier values were
in the industry regression method, 38.334, and the market price earnings intrinsic value,
79.50. We used the intrinsic values of the market regression 52.49 and the industry
average value of 54.57. This average intrinsic value was 53.53. This is our best estimate
of the intrinsic value, and Greatbatch Inc. is definitely undervalued compared to its
current price of $45.54. This shows that investors should be expecting growth in the
future if they were to decide to invest in an industry alternative option.
c)
Summary/Recommendation
Mine Safety Appliances is a strong company that is in a corner of the market
without a lot of competition. This means that their products are not only unique, but they
are also highly sought by clients solely due to the fact there aren’t many other places to
acquire the tools and equipment they need for workers safety. Founded in 1914 MSA has
roots dating back to the industrial era. Their survival and future growth potential is due to
being in a niche market which they use as an advantage. MSA like other companies that
exist in niche markets have issues penetrating the market deeply particularly the
international markets and taking full competitive advantage. This often takes time and
MSA realizes that once this is achieved the company can reach new highs. A key factor
for MSA is the constant innovation provided to the industry. MSA has patents from as
recently as 2013 which proves their superior drive and dedication to R&D. Due to these
factors we not only believe that MSA will continue to grow as a company but will lead
the industry in worker safety appliances.
We have determined that Mine Safety Appliances is an undervalued firm with a
current stock price of roughly $52. We estimate the growth of the stock price to increase
by roughly 15-20% within the next year. This is great news for investors interested MSA
and have short term portfolio goals. While MSA may not seem like the ideal investment
option with competing companies such as Greatbatch, Inc. having better projected P/E
ratio and PEG ratio; one mustn’t forget that the beta of Greatbatch, Inc. (1.69) is also
higher than that of MSA (1.51). The less volatile stock of MSA should keep investors
happy not having to actively manage their portfolio. MSA is a proven company with
excellent growth over the past 5 years, with prices having more than double over that
span. We expect that trend to continue moving forward, but at not such a high rate of
growth. The growth pace has slowed of late as the market is adjusting to the true price of
MSA. After doing research we have determine that in investment in MSA would be a
great decision for any investor in the short term and long term. Upward trending prices
and undervalued stock price’s makes MSA a no brainer to purchase.
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